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Prospects andOpportunities

of Foreign DirectInvestment

in Financial Market

of Bangladesh

Prospects andOpportunities of Foreign

Direct Investment in

Financial Marketof Bangladesh

Course Title Financial Markets & Institutions

Course No. – F-618

Prepared ForMr. Salahuddin A. Khan

Professor Department of Finance

Faculty of Business StudiesUniversity of Dhaka

Prepared by

Tasnim Rahman (ID# 11022)Rumana Jalil (ID # 11048)

Rubaiya Parveen (ID# 11054)Homaira Sartaz (ID# 12018)

Ifat Ara (ID# 12048)

Date of SubmissionAugust 16, 2008

Evening MBA ProgramDepartment of Finance

University of Dhaka

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Page2



PART – I

INTRODUCTION

Page3



PART – II

LITURATURE REVIEW

Page4



PART – III

FOREIGN DIRECT INVESTMENT:

GOING GLOBAL PERSPECTIVE

Page5



PART – IV

FOREIGN DIRECT INVESTMENT

IN BANGLADESH

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PART –V

FDI THE BASIC POLICY FRAMEWORK

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PART –VI

FDI THE EMPIRICAL ANALYSIS

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LETTER OF TRANSMITTAL

August 16, 2008

Mr. Salahuddin A. KhanProfessor,Department of FinanceFaculty of Business StudiesUniversity of Dhaka

Letter of TransmittalDear Sir,

We are very much glad to submit this report on “Prospectsand Opportunities of Foreign Direct Investment in FinancialMarket of Bangladesh” for which we are assigned by you.We have tried our best to prepare this report properly by maintaining the rules and regulations.

We hope that you would be kind enough to consider us for

any mistake in preparing this report. For further clarificationregarding this report, please feel free to call us.

Sincerely

yours,

Tasnim Rahman (ID# 11022) :Rumana Jalil (ID # 11048) :Rubaiya Parveen (ID# 11054) :Homaira Sartaz (ID# 12018) :Ifat Ara (ID# 12048) :

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PREFACE

We have assigned by Mr. Salahuddin A. Khan, Professor, Department of Finance,

Faculty of Business Studies, and University of Dhaka for the fulfillment of our course

requirement of “Financial Markets and Institutions (F-618)”.

Maximum production, full employment, attainment of overall economic development and

ensuring social justice are the objectives of any country whether it is developed or

developing. The attainment of the above objectives of a country largely depends on the

availability of resources. There are two ways of financing the development activities of a

country, i.e., internal and external. Developing countries, characterized by low savings, per

capita income, GDP cannot afford to maintain their desired economic development through

internally generated fund and has to rely on external funding. The sources of external

financing are diverse, e.g., aid, grant, Foreign Direct Investment (FDI), etc.

Investment has acquired considerable emotive force in any country. It is viewed as

beneficial on employment creator-as it brings about economic development. Foreign Direct

Investment in financial market can be termed as capital flowing from a firm or individual

within the country or in one country to a business or businesses in another country

involving. It increases the economic growth; sustain increase in real, per capita income and

national product. It accelerates the industrial innovation, which develops in integration;

take a variety form that is not necessarily mutually exclusive. It also brings infrastructure

development and modem nationalism.

This course helps us to receive more knowledge about the role of Foreign Direct

Investment in Financial Market in Bangladesh for the economic development of the

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country, the needs, opportunities and prospects to invest in a country and what factor

attracts the foreign investors to invest directly in a country’s financial market.

TABLE OF CONTENTS

Prefatory Parts

Letter of Transmittal

Preface

Table of Contents

Executive Summary

Pages#

(i)

(ii)

(iii-vi)

(vii)

Part-I: Introduction

1.1 Origin of The Report

1.2 Objective of The Report

1.3 Purpose of The Report

1.4 Problem Statement

1.5 Limitations of The Report

1.6 Methodology

1

1-2

2

2

2

3

Part-II: Literature Review (Foreign Direct Investment)

2.1 Balance of Payments

2.2 Current Account

2.3 Capital Account

2.4 Component of Current Account

2.5 Component of Capital Account

2.6 Foreign Direct Investment(FDI)

2.7 Factors affecting FDI

4

4

4

44

4

4-5

5

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2.8 Importance of Foreign Investment

2.9 Types of FDI

2.10 Determinants of FDI Flow

5

6

6-8

Part-III : Foreign Direct Investment: Going GlobalPerspective

FDI has changed in the Past Decades

Licensing and technology transfer

Reciprocal distribution agreements

Joint venture and other hybrid strategicalliances

Portfolio Investment

FDI is important for any consideration of going global

The basic requirements for companiesconsidering a foreign

investment

9

10-13

13

13-14

Part-IV: Foreign Direct Investment in BangladeshForeign Direct Investment: Bangladesh

Perspective

Background Why FDI is necessary in Bangladesh?Expectation form FDIWhy invest in Bangladesh?

Policies towards attracting FDI in BangladeshPolitical Areas for Investment Industrial Policy reforms of BangladeshWhy FDI is not flowing into Bangladesh?Favorable policies and incentive schemesRegulatory and legal issues

15-16

16

16

16-17

17

1818-19

19-20

20-24

24

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4.1 Scenario of Foreign Investment inBangladesh

4.2 Bangladesh- An Investment Destination

in South Asia &Factors Attracting FDI in Bangladesh4.3 Doing Business: Costs & Other Aspects

4.4 Incentive offered by Govt. of Bangladesh

4.5 Guarantees through Multilateral Agencies

4.6 Foreign Investment Protection Act

4.7 The magnitude of FDI Flow in Bangladesh

4.8 Massive Boom of Foreign Investment inBangladesh

4.9 Major Impediment to Inflow of FDI

4.10 Coordinating agent of FDI in Bangladesh

Industrial Policy and Flow of FDI inBangladesh

Policy during the post-liberation period

Announcement of Industrial policy in 1982Development Up to 1986Revised Policy in 1992

Latest Industrial Policy

Flow of FDI in Bangladesh

25-26

26-28

28-30

30

30

31-36

36-37

37-38

39

40-43

43-44

Part-V : FDI The Basic Policy Framework

FDI associated outward remittances

The debate on the impact of FDI

45-47

47-48

48-49 Part VI: FDI The Empirical Analysis

6.1 History of FDI

6.2 Types of FDI

50

50-51

51-52

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6.3 What is a quality FDI?

6.4 Influence of FDI

6.5 FDI in Bangladesh: Some Case Studies: Asia Energy and the Phulbari Occurrence

Investment from Saudi Prince/s:

Investors from India: TATA ; Mittal

Investment in Mobile phone Sector and Transfer of foreign Exchange

FDI: Bangladesh Perspective:

6.6 FDI Inflow by Sources

Attractions for FDI in Bangladesh: Why invest in Bangladesh?

Problems hindering FDI

Strategies to boost Export – a source of FDI

Opportunities for the Foreigners

Foreign Investment Attraction: Role of BOI

Role of FICCI

Important of Transparency for FDI?

6.8 Recommendations to improve the Scenarioof FDI:

52

52-57

57-62

63-70

70-76

Conclusion

Recommendation

Bibliography

77

78

79

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EXECUTIVE SUMMARY

Investment has acquired considerable emotive force in any country. It is viewed as beneficial on employment creator-as it brings about economic development. ForeignDirect Investment (FDI) can be termed as capital flowing from a firm or individual withinthe country or in one country to a business or businesses in another country involving for making profit. It increases the economic growth; sustainable increase in real, per capitaincome and national product and accelerates the industrial innovation. The stability of FDI and its emergence is an important source of foreign capital in the financial marketfor development of economy. Foreign investment can play an important role in the quick execution of the industrial program in Bangladesh by providing external support. As adeveloping country, Bangladesh needs foreign direct investment (FDI), which is one of the important factors in the development process.

Through out the report we have tried to reflect global prospects and opportunities of foreign direct investment in financial market of Bangladesh. Bangladesh have FDIgrowth prospect in recent years. The report is divided into several parts–– The first part of this report is focused on the introductory things.

The second part gives a literature review about Foreign Direct Investment.

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The third part of this report presents the Perspective of Foreign Direct Investment inglobal concern. This part emphasizes the extraordinary and growing role of FDI inglobal business. It also includes the changes of FDI in the past decades, Importance of FDI for any consideration of going global and the basic requirements of a company for foreign investment.

The fourth part includes the Foreign Direct Investment in Bangladesh. In this part weanalyzed the importance of FDI in Bangladesh for the development process of thecountry. It includes reasons for investing in Bangladesh, major areas of investment, policies and incentives taken by government for attracting FDI in Bangladesh and thegrowth of FDI in different sectors of the country. We tried to identify the scenario of FDIin Bangladesh, what factors attract the FDI inflow and its impediments.

The fifth part shows the basic policy framework of FDI. In this part we described themajor policies and incentives taken by the government to attract FDI such as tax

concessions, tax holidays, accelerated depreciation on plants and machinery and exportsubsidies and import entitlements etc.

The sixth part includes the empirical analysis of Foreign Direct Investment. In theempirical analysis part we analyzed massive areas of investment in the most recent years.

The conclusion and recommendation are also included in the report.

Part –I

Introduction

Sustained and high level of economic growth is perquisite for socio-economic development of Bangladesh. Broad-baseddevelopment model to benefit all people only can ensure overall improvement of living standard through eradication of poverty through eradication of poverty,elimination of diseases and illiteracy and creation of employment. In a land-starved country like Bangladesh rapid industrialization is a major essential

element. Foreign Direct investment has long been a subject of industrialdevelopment.

1.1. Origin of the Report:

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SALAHUDDIN A. KHAN, Professor, Department of Finance, Faculty of Business Studies, University of Dhaka, assigned the reporttitled “PROSPECTS AND OPPORTUNITIES OF FOREIGN DIRECT INVESTMENT (FDI)

IN FINANCIAL MARKET OF BANGLADESH”

This assignment was for the fulfillment of course“FINANCIAL MARKET AND INSTITUTION.

This report is based on inflows of foreign investment inBangladesh, the opportunities available to foreign investors in Bangladesh andscenario of foreign investment in recent years.

1.2. Objective of the Report:

The main objectives of this report are-

• To provide insight about FDI, its prospect and opportunities have inBangladesh.

• To assess the need of FDI for strengthening a country’s economicdevelopment.

• To examine the suitability and favorable environment for FDI.

• To assess the requirements of building a strong market for FDIthrough enhancing all relative micro and macro economic factors asa means of speeding real economic growth.

• To assess the major impediments of inflow of FDI and to identifythe factors that encourage the inflow if FDI.

1.3. Purpose of Study:

FDI is the acquisition of managerial control by a citizen or

FDI traditionally implies export of real capital from home to the host nation. In anera of volatile flows of capital, the stability of FDI and its emergence is animportant source of foreign capital for any developing economy. As a developingcountry, Bangladesh needs foreign direct investment (FDI), one of the importantfactors in the development process and the economy of country can foster in agreat way. FDI and economic prosperity of a country are related terms, it is

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necessary to know about FDI, it impact and the future prospects though there may be some argument against it present.

1.4. Problem Statement:

The problem that assigned to us is –“ PROSPECTS AND

OPPORTUNITIES OF FOREIGN DIRECT INVESTMENT (FDI) IN FINANCIAL MARKET

OF BANGLADESH

1.5. Limitation of the Report:

The main constrain we faced confusion and lack onlimited knowledge in order to fulfill the objectives of preparing the report. Alsothere was limited information available to prepare this report.

The time was very limited for preparing this type of report. In spite of all those, we have taken all reasonable care to ensure accuracyand quality to make the report standard.

1.6. Methodology:

We have collected data from the primary as well as thesecondary sources. We have collected desired information through opendiscussion. Also we have collected the secondary data from published journal andthrough web site.

Primary Sources:

a) Open discussion

b) Observation

Secondary Sources:

a) Web-siteb) Published data/Information regarding FDI.c) BOI, BB Publicationsd) Different books & Statistical Year Book of Bangladesh

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Part –II

Literature Review (Foreign DirectInvestment)

2. 1 Balance of Payment:

The balance of payments is a summary of transactions betweendomestic and foreign residents for a specific country over a specific period of time

2 .2 Current Account:

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The Current Account represents a summary of the flow of

funds between one specific country and all other countries due to purchase of

goods or services or the provision of income on financial assets.

2.3 Capital Account :

Capital Account represents a summary of flow of funds

resulting from the sale of assets between one specified country and all other countries over a specified period of time.

2 .4 Component of Current Account :

• Balance of trade

• Factor Income

• Transfer Payments

2.5 Component of Capital Account :

• Foreign Direct Investment

• Portfolio Investment

• Other Capital investment

2. 6 Foreign Direct Investment;

Foreign direct investment represents the investment in fixed assets in foreign countries that can be used to conduct business operations.

Examples :A firms acquisitions of a foreign company , its construction of a new

manufacturing plant or its expansion of an existing in a foreign country .

2.7 Factors Affecting Foreign Direct Investment:

• Changes in restrictions

• Privatization

• Potential economic growth

• Tax rates

• Exchange rates

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FDI is the category of international investment that reflectsthe objective of obtaining a lasting interest by a resident entity one economy in an

enterprise resident in another economy to another for making profit . The flow of

foreign capital in the form of foreign investment Cab Bridge the resource gap of

the host country.

FDI refers to an 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. The foreign entity or group of associated entities that makes theinvestment is termed the "direct investor".

2.8. Importance of Foreign Investment:

Due to insufficient internal resources, foreign investment can play an important role in the quick execution of the industrial program in

Bangladesh by providing external support. Foreign direct investment can make a

direct contribution to-

ö Introduce improved technology

ö Open up new horizon for R&D expenditures

ö New investments including FDI generate additional employment, train

local executives and workers.

ö Mobilization o local resources for investment in manufacturing, trade and

service sectors.ö Create new sources of tax revenue for the government.

2.9. Types of FDI

FDI is mainly of three types-

Type-A: Type A includes the investment by the foreign investors in 100% foreign owned projects as well as investment by Bangladesh nationals

ordinarily residing abroad. Under this type, total investment cost of the project including cost of construction, raw naturals and the entire working capital

requirement are financed by the entrepreneurs own foreign exchange

resources.

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Type-B: Type B includes investment in joint venture projects between

foreign and Bangladesh entrepreneurs resident in Bangladesh. Under this

type, the cost of capital machinery, spare parts and raw materials are

provided by the foreign partners from funds to be brought abroad. The

Bangladeshi partners may contribute local currency cost of the investment

including working capital.

Type-C: Type C includes investment by 100% Bangladeshi

entrepreneurs resident in Bangladesh. Under this type, the cost of machinery

spare parts, raw materials and other imported capital gods are financed under

non-reportorial foreign exchange, Wage Earners` Earners` Scheme or such

other arrangements as may be approved.

2.10. Determinants of FDI Flow:

FDI was phenomenon that primarily concern highlydeveloped economics. Developed countries still attract a higher share of world

FDI than developing countries. But in recent yeas the increase in FDI flow to

developing countries turned out to be higher than the increase in FDI flow to

developed countries. Here some determinants are given which have impact on

attracting more of FDI flow.

Size of the market:

Econometric studies comparing a cross section of countries

indicate a well-established correlation between FDI and the size of the market aswell as some of its characteristics (for example, average income levels and growth

rates). Some studies found GDP growth rate to be a significant explanatory

variable, while GDP was not, probably indicating that where the current size of

national income is very small as an indicator of market potential.

Labor Costs and Productivity:

Empirical research has also found relative labor costs to be

statistically significant, particularly for foreign investment in labor-intensive

industries and for export-oriented subsidiaries. The decision to invest in Bangladesh, for example, has been heavily influenced by the prevailing low wage

rate. The rapid growth in FDI to Vietnam has also been attributed primarily to the

availability of low-cost labor. When the cost of labor is relatively insignificant

(when wage rates vary little from country to country), the skills of the labor force

are expected to have an impact on decisions about FDI location.

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Potential Economic Growth:

Countries that have greater potential for economic growth

are more likely to attract FDI because firms recognize that they may be able to

capitalize on that growth by establishing more business there .

Tax rate :

Countries that impose relatively low tax rates on

corporate earnings are more likely to attract FDI .When assessing the feasibilityof FDI, firms estimates the after-tax cash flows that they expect to earn.

Exchange rates :

Firms typically prefer to direct FDI to countries where

the local currency is expected to strengthen against their own. Under thiscondition, they can invest funds to establish their operations in a country while

that country’s currency is relatively cheap. Then earning from the new operationscan periodically be converted back to the firm’s currency at a more favorable

exchange rate.

Political Risk :

The ranking of political risk among FDI determinants

remains somewhat unclear Foreign Company is confident of being able to operate

profitably without undue risk to its capital and personnel, it will continue toinvest. Specific proxy variables (e.g. number of strikes and riots, work days lost,

etc.) have proved significant in some studies; but these quantitative estimates can

capture only some aspects of the qualitative nature of political risk. Surveys

carried out that political instability, expressed in terms of crime level, riots, labor

disputes and corruption is an important factor for restraining substantial foreign

investment.

incentives and Operating Conditions :

Most of the empirical evidence supports the notion that specific incentives such as lower taxes have no major impact on FDI, particularly

when they are seen as compensation for continuing comparative disadvantages.

On the other hand, removing restrictions and providing good business operating

conditions are generally believed to have a positive effect

However in brief, Table 2.1 shows the host country determinants of FDI-

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Relating toResourceseeking FDI

Relating toMarket seekingFDI

Relating toEfficiency seeking FDI

Raw material Market Size Productivity adjusted labor cost

Complementary Factor of Production

Market Growth Sufficiently skilled labor

Physical Infrastructure Regional Integration Business related ServiceTrade Policy

Part –III

Foreign Direct Investment: GoingGlobal Perspective

Foreign direct investment plays an extraordinary and growing

role in global business. It can provide a firm with new markets and marketing

channels, cheaper production facilities, access to new technology, products, skills

and financing. For a host country or the foreign firm which receives the

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investment, it can provide a source of new technologies, capital, processes,

products, organizational technologies and management skills, and as such can

provide a strong impetus to economic development. Foreign direct investment, in

its classic definition, is defined as a company from one country making a physical

investment into building a factory in another country.

The direct investment in building, machinery and equipment is incontrast with making a portfolio investment, which is considered an indirect. In

recent years, given a rapid growth and change is global investment patterns, the

definition has been broadened to include the acquisition of a lasting management

interest in a company or enterprise outside the investing firm’s home country. As

such, it may take many forms, such as a direct acquisition of a foreign firm,construction of a facility, or investment in a joint venture or strategic alliance

with a local firm with attendant input a technology, licensing of intellectual

property. In the past decade, FDI has come to play a major role in the

internationalization of business.

Reacting to changes in technology, growing liberalization of thenational regulatory framework governing investment in enterprises, and changesin capital markets profound changes have occurred in the size, scope and methods

of FDI. New information technology systems, decline in global communication

costs have made management of foreign investments far easier than in the past.

The sea changes in trade and investment policies and the regulatory environment

globally in the past decade, including trade policy and tariff liberalization, easing

of restrictions on foreign investment and acquisition in many nations, and thederegulation and privatization of many industries, has probably been the most

significant catalyst for FDI’s expanded role.

The most profound effect has been seen in developing countries,where yearly foreign direct investment flows have increased from an average of

less than $10 billion in the 1970’s to a yearly average of less than $20 billion in

the 1980’s, to explode in the 1990s from $26.7 billion in 1990 to $179 billion in

1998 and $208 billion in 1999and now comprise a large portion of global FDI.

Driven by merger and acquisitions and internationalization of production in a

range of industries, FDI into developed countries last year rose to $638 billion,

from $481 billion in 1998.

Proponents of foreign investment point out that the exchange of

investment flows benefits both the home country. Opponents of FDI note that

multinational conglomerates are able to wield great power over smaller and weaker economies and can drive out much local competition. The truth lies

somewhere in the middle.

For small and medium sized companies, FDI represents an

opportunity to become more actively involved in international business activities.

In the past 15 years, the classic definition of FDI as noted above has changed considerably. This notion of a change in the classic definition, however, must be

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kept in the proper context. Very clearly over 2/3 of direct foreign investment is

still made in the form of fixtures, machinery, equipment and buildings. Moreover,

larger multinational corporations and conglomerates still make the overwhelming

percentage of FDI. But, with the advent of the Internet, the increasing role of

technology, loosening of direct foreign investment restrictions in many markets

and decreasing communication costs means that newer, non-traditional forms of investment will play an important role in the future. Many governments, especially

in industrialized and developed nations, pay very close attention to foreign direct

investment because the investment flows into and out of their economies can and

does have a significant impact.

In the United States, the Bureau of Economic Analysis, a section of the U.S. Department of Commerce, is responsible for collecting

economic data about the economy including information about foreign direct

investment flows. Monitoring this data is very helpful in trying to determine the

impact of such investments on the overall economy, but is especially helpful in

evaluating industry segments. State and local governments watch closely becausethey want to track their foreign investment attraction programs for successful outcomes.

FDI has Changed in the Past Decades

The overwhelming majority of foreign direct investment is made

in the form of fixtures, machinery, equipment and buildings. The investment isachieved or accomplished mostly via mergers and acquisitions. In the case of

traditional manufacturing, this has been the primary mechanism for investment

and it has been heretofore very efficient. Within the past decade, however, therehas been a dramatic increase in the number of technology startups and this,

together with the rise in prominence of Internet usage, has fostered increasing

changes in foreign investment patterns. Many of these high tech startups are very small companies that have grown out of research and development projects often

affiliated with major universities and with some government sponsorship.

Unlike, traditional manufacturers, many of these companies do not

require huge manufacturing plants and immense warehouses to store inventory.

Another factor to consider is the number of companies whose primary product is

an intellectual property right such as these can be housed almost anywhere and

therefore making a capital investment in them does not require huge outlays for

fixtures, machinery and plants.

In many cases, large companies still play a dominant role in

investment activities in small, high tech oriented companies. However, unlike in

the past, these larger companies are not necessarily acquiring smaller companies

outright. There are several reasons for this, but the most important one is most

likely the risk associated with high tech ventures. In the case of mature industries,

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the products are well defined. The manufacturer usually wants to get closer to its

foreign market or wants to circumvent some trade barrier by making a foreign

direct investment. The major risk here is that you do not sell enough of the

product that you manufactured. However, you have added additional capacity and

in the case of multinational corporations this capacity can be used in a variety of

ways.

High tech ventures tend to have longer incubation periods. That

is, the product tends to require significant development time. In the case of

software and other intellectual property type products, the product is constantly

changing even before it hits the marketplace. This makes the investment decisionmore complicated. When you invest in fixtures and machinery, you know what the

real and book value of your investment will be. When you invest in a high tech

venture, there is always an element of uncertainty. Unfortunately, the recent spate

of dot.com failures is quite illustrative of this point.

Therefore, the expanded role of technology and intellectual property has changed the foreign direct investment playing field. Companies are

sill motivated to make foreign investments, but because of the vagaries of

technology investments, they are now finding new vehicles to accomplish their

goals. Consider the following:

Licensing and technology transfer:Licensing and tech transfer have been essential in promoting collaboration

between the academic and business communities. Ever since legal hurdles

were removed that allowed universities to hold title to research and development done in their labs, licensing agreements have helped turned raw

technology into finished products that are viable in competitive marketplace.

With some help of a variety of government agencies in the form of grants for

R&D as well as other financial assistance for such things as incubator

program , once timid college researchers are now stepping out and becoming cutting edge entrepreneurs. These strategic alliances have had a

serious impact in several high tech industries. Industry clusters are now

growing up around the university labs where their derivative technologies

where their derivative technologies were first discovered and nurtured.

Licensing agreements allow companies to take full advantage of new and

exciting technologies while limiting their overall risk to royalty paymentsuntil a particular technology is fully developed and thus ready to put new

products into the manufacturing pipeline.

Reciprocal distribution agreements:This type of strategic alliance is more trade-based, but in a very real sense it

does in fact represent a type of direct investment. Basically, two companies,

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usually within the same or affiliated industries, agree to act as a national

distributor for each other’s products. The classical example is to be found

in the furniture industry. A U.S. based manufacturer of tables signs a

reciprocal distribution agreement with a Spanish-based manufacturer of

chairs. Both companies gain direct access to the other’s distribution network

without having to pay distributor support payments and other related expenses found within the distribution channel and neither company can hurt

the other’s market for its products. Without such an agreement in place,

Spanish manufacturer might very well have to invest in a national sales

office to coordinate its distributor network, manage warehousing, inventory

and shipping as well as to handle administrative tasks such as accounting, public relations and advertising.

Joint venture and other hybrid strategic alliances:The more traditional joint venture is bi-lateral, that is it

involves two parties who are within the same industry who are partnering for some strategic advantage. Typical reasons might include a need for access

to proprietary technology that might tip the competitive edge in another

competitor’s favor, desire to gain access to intellectual capital in the form of

ultra-expensive human resources, access to heretofore closed channels of

distribution in key regions of the world.

One very good reason why many joint ventures only

involve two parties is the difficulty in integrating different corporate

cultures. With two domestic companies from different cultures, it is almost

impossible at times. This is probably why pure joint ventures have a fairly

high failure rate only five years after inception. Joint ventures involving three or more parties are usually called syndicates and are most often

formed for specific projects such as large construction or public works

projects that might involve a wide variety of expertise and resources for

successful completion. In some cases, syndicates are actually easier to

manage because the project itself sets certain limits on each party and closecooperation is not always a prerequisite for ultimate success of the endeavor.

Portfolio investment: For most of the latter part of the 20th century when FDI became an issue, a

company’s portfolio investments were not considered a direct investment if

the amount of stock and capital was not enough to garner a significant

voting interest amongst shareholders or owners. However, two or three

companies with soft investments in another company could find some mutual interests and use their shareholder power effectively for management

control. This is another form of strategic alliance, sometimes called “shadow

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alliance”. So, while most company portfolio investments do not strictly

qualify as a direct foreign investment, there are instances within a certain

context that they are in fact a real direct investment.

FDI is important for any consideration of going global

A direct foreign investment allows companies to accomplish several tasks:

√ Avoiding foreign government pressure for local production.

√ Circumventing trade barriers, hidden and otherwise.

√ Making the move from domestic export sales to a locally-based national

sales office.

√ Capability to increase total production capacity.

√ Opportunities for co-production, joint ventures with local partners, joint

marketing arrangements, licensing, etc;

A more complete response might address the issue of global

business partnering in very general terms. While it is nice that many business

writers like the expression, “ think globally, act locally”, this often used cliché

does not really mean very much to the average business executive in a small

medium companies tend to be more on access issues. SME’s in particular are now

focusing on access to markets, access to expertise and most of all access to

technology.

The basic requirements for companies considering a foreign investment:

Depending on the industry sector and type of business, a foreign

direct investment may be an attractive and viable option. With rapid globalization

of many industries and vertical integration rapidly taking place on a global level,

at a minimum a firm needs to keep abreast of global trends in their industry. From

a competitive standpoint, it is important to be aware of whether a company’s

competitors are expanding into a foreign market and how they are doing that. At

the same time, it also becomes important to monitor how globalization is affecting

domestic clients. Often, it becomes imperative to follow the expansion of key

clients overseas if an active business relationship is to be maintained.

New market access is also another major reason to invest in a foreign country. At

some stage, export of product or service reaches a critical mass of amount and

cost where foreign production or location begins to be more cost effective. Any

decision on investing is thus a combination of a number of key factors including:

1. Assessment of internal resources 2. Market analysis

3. Competitiveness 4. Market expectations

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Part –IV

Foreign Direct Investment in

Bangladesh

Until the1980s, most developing countries viewed FDI with great

weariness. In recent years, however FDI restrictions have been dramatically

reduced. Most countries offer incentives to attract FDI, such as tax concessions,

Page30



tax holidays, accelerated depreciation on plants and machinery and export

subsidies and import entitlements. As a developing country, Bangladesh needs

foreign direct investment (FDI), one of the important factors in the development

process. Since the early eighties Bangladesh opened its door and welcomed

foreign investors.

FOREIGN DIRECT INVESTMENT: BANGLADESH PARSPECTIVE

Background:

Bangladesh is a semitropical riverine nation with fertile soil and a high

vulnerability to floods and cyclones. Most Bangladeshis (approximately 85%) live in

rural areas and make their living from agriculture. With 140 million people crowded into

an area the size of Wisconsin, Bangladesh has the highest population density of any

country, except city-states such as Singapore. Since independence in 1971, Bangladesh

has been one of the world's poorest countries, although agricultural output has increased

steadily since independence, and the country is nearly self-sufficient in food during

normal years. The country historically had received annually the equivalent of close to

6% of GDP in foreign assistance disbursements, but this figure has declined to around 3-

4% in recent years as GDP has increased while aid utilization has leveled off.

Bangladesh has experienced fairly robust economic growth during the last decade, which

saw restoration of a democratically elected government (however current passing

through the state of emergency, hope it wouldn't continue for long) and a steady, albeit

slow, liberalization of the economy. The average annual growth of GDP in the ten-year period from FY 91 through FY 2000 was 4.8 however the country presently has sustained

the GDP growth of around 6.7%. However, these growth rates fall short of the levels

needed to reduce significantly the poverty that afflicts one in three Bangladeshis.

Relative political stability and record back-to-back agricultural harvests allowed

Bangladesh to post respectable economic growth, since the devastating flood of 1998.

Despite this relatively good economic performance in the last decade, the economy is

beset with many structural weaknesses, which the government has yet to address. Chief

among these weaknesses are a weak financial sector, an unproductive and chronically

money losing public sector, poor infrastructure, lack of export diversification, and pervasive corruption at all levels of the society. The failure of the political system to

address these longstanding economic problems has adversely affected the business

environment and investment climate. These weaknesses also account for the continuing

fragile and vulnerable macroeconomic situation

.

Why FDI is necessary in Bangladesh?

Page31



It is an important question, whether FDI is necessary or not? Government of

our country always welcomes FDI, as they claim they are in short of capital. Generally,

Bangladesh is a low income country. In 2005, per capita income was 470 US$. National

savings of the country is also very low. So in some cases we need FDI, but whatever the

amount of investment is, it must be qualitative. Government must have proper control over FDI.

Expectation from FDI

More foreign investment can lead to more jobs in Bangladesh, reducing

unemployment, decreasing the level of poverty in the country and increasing the per

capita GDP of Bangladesh. It can also be used to increase competition in the economy

and can serve as a vehicle through which global best practice and technology are

transferred to domestic firms, leading to wider acceptance and practice of principles likeCorporate Governance and Corporate Social Responsibility. Finally, increased foreign

investment can help Bangladesh successfully meet the major challenge of post-MFA era,

how to diversify our export basket and move away from exporting mostly RMG. This is a

necessary precondition to Bangladesh’s survival in today’s new globalizing world.

Why invest in Bangladesh?

Bangladesh is a lucrative place for foreign investors. The country is rich in

natural resources like oil, gas, coal, water etc. A huge number of cheap labor forces areanother attraction for FDI. Government provides infrastructure facility, subsidized gas,

electricity, port facility etc. Main reasons are described below to invest in Bangladesh:

• 140 m population, 50 m civilian labor force

• trained and educated workforce at low wage rate

• sizeable domestic market

• steady growth of GDP

• stable rate of exchange

• low interest rate, low rate of inflation

• comfortable foreign exchange reserve

Policies towards attracting FDI in Bangladesh

In Bangladesh FDI is allowed in every sector of the economy except in five industries

eserved for the public sector such as defense equipment, nuclear energy, forest

Page32



plantation, security printing and railways. Bangladesh has adopted a number of policies

and provided enerous incentives to attract FDI into the country. Existing policies are as

follows:

•tax holiday from 5-10 years depending on location of industries

• 15 year's tax holiday for private power generation companies

• facilities for repatriation of invested capital, profit and dividend

• exemption of tax on interest on foreign loan

• tax exemption on royalties, technical know-how and technical assistance fees

• avoidance of double taxation on the basis of bilateral agreement

• six months multiple entry visa for the investors

• Taka, the nation's currency, is convertible for international payments in the

current account

• Re-investment of repatriable dividend treated as new investment

• Working capital loan, as well as term loan, from local commercial banks allowed

to the industries set up with foreign capital

• Citizenship by investing a minimum of US$ 5,00,000 or by transferring US$

10,00,000 to any recognized financial institution (non- repatriable).

Potential Areas for Investment

Investments in areas of manufacturing and services are welcome. Investors are free to

choose fields of investment. However, from the point of view of comparative advantage,the following are potential areas for investment.

Textile: Export market of US$ 2 billion from the garments sector and a large domestic

market. Infrastructure: energy, telecommunication, oil and gas, ports, highways and

bridges.

Agro based Industry: dairy and poultry, processing of fruits and vegetables, shrimp, fish

culture and processing, shrimp feed plants etc. Labor-intensive Industries: electronics,

data processing and software development, electrical goods and accessories, light engineering goods, toys, jewellery and others.

Industrial Policy Reforms of Bangladesh

• Liberalized Industrial Policy

• Export-oriented, private sector-led growth strategy

Page33



• No limitation pertaining to equity participation i.e. up to 100 per cent foreign

private investment allowed

• Except five reserve sectors, all industries are open for private investment.

Industries earmarked for public sector investment are included in the reserve

sector namely: (I) arms, ammunition and other defense equipment and machinery(ii) production of nuclear energy (iii) forest plantation and mechanized extraction

within the bounds of reserved forests (iv) security printing (currency notes) and

minting, and (v) railways and air transportation (except certain domestic routes

and air cargo)

• No permission of the Government required to set up new industries

• For obtaining institutional facilities like procurement of land, electricity, gas and

sewerage connection, importation of capital machinery and raw materials, tax

rebate, duty drawback facilities etc., industries need only to be registered with the

Board of Investment (BOI) in a simple prescribed from.

Why FDI is not flowing into Bangladesh?

Bangladesh has adopted a number of policies and provided generous incentives to

attract foreign direct investment (FDI) into the country and the country seems to offer

perhaps the most liberal FDI regime in South Asia. Yet, the flow of FDI has been

shrinking every year. There is also serious lacuna in estimation of the FDI figures. There

was till recently serious discrepancy between the Board of Investment (BOI) and

Bangladesh Bank figures on FDI. There has been an attempt at reducing this gap byaddressing the issues related to the registration and realisation of FDI. There are also

methodological problems in counting FDI figures, particularly in case of multinational

corporations (MNCs) based in Bangladesh. Are all the investments made by MNCs using

local resources also FDI? These are many such questions, which need to be addressed in

order to streamline the FDI figures. In any case, let us look at the FDI regime in

Bangladesh.

Salient features of this regime will help us understand the regulatory

issues concerning the inflow and operation of FDI.

Favorable policies and incentive schemes

* FDI is allowed in every sector of the economy except in 5 industries

reserved for the public sector (i.e., defense equipment, nuclear

energy, forest plantation, security printing, and railways).

Page34



* Tax holiday for 5 to 7 years from the month of commencement of

production.

* Private sector power companies enjoy income tax exemption for 15

years from the date of commercial production

* Foreign enterprises and/or experts get tax exemption on their

royalties and technical fees.

* For tax paying foreign enterprises there are bilateral arrangements

with major trading partners which protects the foreign firms from

double taxation

* 100 per cent export-oriented units do not have to pay any duty for

importing machinery and spare parts.

* Foreign technicians or experts are exempt from income tax during

the first three years of their employment.

* Full repatriation of profit and dividend by the foreign companies is

permitted.

* Re-investment of repairable dividend is treated as new investment.

* Foreign investors or companies are free to apply for full working

capital loans from the local banks in which case no restrictions apply

as the terms of loans are determined on the basis of bank-client

relationship.

* 100 per cent foreign firms or joint ventures are NOT required to sell

their shares through public issues and they are eligible to buy shares

through the stock exchange.

* Apart from the above, Foreign Investment Promotion and Protection Act, 1980 of Bangladesh provides for:

* Non-discriminatory treatment between foreign and local investment

* Protection of foreign investment from expropriation by the state and

ensures repatriation of proceeds from sale or shares and profit.

Page35



Bangladesh is also a signatory of the Multilateral Investment

Guarantee Agency insuring investors against political risk. As a

member of World Intellectual Property Organisation (WIPO) and World

Association of Investment Promotion Agencies (WAIPA) the country

further safeguards the interest of foreign investment.

Standard dispute settlement procedures are followed in case there is

any dispute with the government or with any private party. If the

foreign investors feel that their rights have been violated, they can file

writs with the High Courts.

Regulatory and legal issues

*At least on papers Bangladesh offers an investor-friendly

environment. The entry and exit provisions for both large and small

foreign investors are well defined and the interests of the investors are

also well protected.

* All FDI needs to be registered either with BEPZA, BSCIC, or BOI. FDI in

EPZ or in any industrial estate should register with BEPZA or BSCIC.

Business elsewhere should be registered with BOI.

* Firms employing ten or more people are also required to be

registered with the Chief Inspector of Factories and Establishments.

* Pre-registration clearance is required for investment in RMG, banks,

insurance companies and other financial institutions.

* Industrial projects need to take clearance from the Environment

Department after conducting environment assessment.

* An industrial unit is required to limit the number of foreign

employees to a maximum of 15 per cent of its total work force

including its senior management.

In general registration of the firms is a simple procedure. Registration

is required to acquire legal status and to access the facilities provided

to foreign investment. The Board of Investment (BOI) now provides

one-step support services which includes, inter alia, free investment

Page36



counseling, utility service connections, handling such problems as

clearing imported machinery under confessional rate of import duty.

Preconditions with regard to employment of foreign people have not

been stringent. This is because labour is cheap in Bangladesh and therefore foreign firms have the incentive to hire local people when

available.

The existing regulatory framework provides several other incentives to

foreign investors. These are:

* There is no restriction on the acquisition of local enterprises by

foreign firms. This means the foreign firms can freely buy any

enterprises in the private sector. Foreign investors may also buy public

sector enterprises earmarked for privatization.

* There is no general local-content requirement for FDI in Bangladesh.

This means foreign firms can freely decide whether to use domestic or

imported raw materials when both of them are available. (However,

only in the pharmaceutical industry raw materials of some drugs will

have to be procured locally. The government also encourages the use

of local raw materials in the production of RMG by providing attractive

financial incentives).

* There is also no general requirement of technology transfer.

However, contracts assigned with foreign oil companies stipulate the

transfer of technology to the national Oil Company.

* For industrial workers there is also no law mandating a minimum

wage. The EPZ has some minimum wage requirements but the

minimum wage is quite low compared to international standard.

Despite those generous incentive regimes FDI flow into Bangladesh

has not been very encouraging. Although there are controversies over

actual amount of FDI inflow into the country, there is no denying that

such inflow is not significant. (It is difficult to quantify the flow of FDI

because of non-reporting problem. Usually the balance of payments

statistics are used to determine the inflow but such measures fail to

give a complete picture. For 1999-2000 estimates on the basis of the

Page37



balance of payments show an FDI inflow of US$174 million, while

compilation of information from various sectors (by the World Bank)

suggest an amount of US$ 629 million. Despite considerable difference

between the two estimates it goes without saying that the relative

importance of FDI in Bangladesh's economy is low by an absolutestandard. During the second half of the 1990s developing countries on

the whole received an FDI inflow close to 2 per cent of their GDP, while

for Bangladesh the corresponding figure is only between 0.2 - 0.5

percent. For the whole South Asia the comparable figure is 0.5-0.7 per

cent of which India's share is about 75 per cent.

Several issues might be held responsible for low FDI inflow into

Bangladesh.

* Although on paper the investment regime looks impressive, there are

actually many problems in accessing some of those attractive

incentives. Lengthy and corrupt bureaucratic procedures result in high

cost of doing business in Bangladesh. For example, in a World Bank

study it has been reported that:

-On an average it took 12 days for exporters to get their imported

inputs released from the ports/airport;

-On an average 9 days to get customs clearance for exporting ashipment;

-7 days to complete all documents for exports; and

-On an average a firm spends more than half a person-year to deal

with government agencies such as customs, port authority, tax

department, etc.

* Despite having a straightforward exit policy, in recent times it has

been alleged that repatriation settlement is not always easy for a firm

that discontinues business or divests.

* A significant proportion of recent FDI inflow to Bangladesh is

concentrated in the development of natural gas sector. Big

multinationals are in favour of selling gas to foreign markets, while

Page38



many in Bangladesh believe that in the best interest of the nation gas

resources should be utilized domestically. This has resulted in an

uncomfortable relationship between the Government of Bangladesh

and foreign investors in this sector.

* Poor law and order situation along with political unrest generates a

felling of uncertainty among the investors

* The closure of ETV that had a substantial FDI, particularly from the

U.S., had a negative impact on the potential foreign investors.

* Bangladesh has always had an image problem and in the post

September 11 period the problem has been worse. News reports citing

Bangladesh as a potential threat have damaged foreign investors'

confidence on Bangladesh. To make things even worse Bangladesh

has been shown to be the world's most corrupt countries.

* The adversarial politics and war of words have been working against

smooth flow of FDI into the country.

* The lack of continuity of policy regime as soon as a government

changes also constraints flow of FDI.

Despite all the above constraints, the importance of FDI cannot be overstated.Currently Bangladesh provides an attractive investment regime but the response from

the investor has not been very encouraging. The regulatory provisions as they appear

on paper are indeed generous. Development friendly FDI regime in Bangladesh is

largely about restoring confidence in the minds of the investors by improving the law

and order situation, by tackling the problem of increased costs of doing business, and

by building a good image of the country. These are, no doubt, big tasks for

Bangladesh -- only success in them will ensure Bangladesh does not become

marginalized in an increasingly globalize world economy. Private sector in

Bangladesh enjoys more freedom, mobility and flexibility. But much more needs to bedone to keep the wheel moving. Yet its performance in manufacturing investment

compared to training has indeed been very unsatisfactory. The extent of join venture

investment has not been impressive either.

The Government of Bangladesh enacted the ‘Foreign Investment Promotion and Protection Act, 1980’ in an attempt to attract FDI . FDI is allowed

Page39



in every sector of the economy except in five industries reserved for the public

sector:

Defence equipment and machinery-arms ammunition,

Production of nuclear energy,

Forestry in the reserved forest area,

Security printing and minting

Railways.

4.1. Scenario of Foreign Investment in Bangladesh:

History shows that FDI had been existing in this country

since pre-liberation period. The general characteristics of FDI during the period

especially in the fifties and early sixties were that mostly it was attracted to export

oriented extractive industries and production of cash crops only. The pattern of negligibly low level of FDI continued in independent Bangladesh up till

1975.From 1975 to 1985 foreign capitals came into this country mainly through

aids and grants.

The Government of Bangladesh enacted the ‘Foreign

Investment Promotion and Protection Act, 1980’ in an attempt to attract FDI.

Beyond enacting the Foreign Investment Promotion and Protection Act, 1980 Bangladesh also established special zones for investment, i.e., the Export

Processing Zones (EPZs) in 1983. Besides, the new Industrial Policy of 1999, the

Companies Act 1994 and the Telecommunications Act 2001 pave the way for

Foreign Direct Investment into the country. Trade Policy has also been liberalized

significantly over the last decade. Following the Bangladesh’s accession to theWTO in 1995, FDI in service sector particularly in Banks and telecommunication

has been increased.

BOI commenced the FDI survey for the first time in

Bangladesh in February 2003, and was well accepted and appreciated by theconcerned authorities and interest group from the government , multilateral agencies, investors, researchers and people in general.

Page40



Graph 4.1

328.3328.3

400441.4

600652.52

800845.3

1000 1000

2 001 -2 002 2 00 2- 20 03 2 00 3- 20 04 2 00 4- 20 05 2 00 5- 20 06

Actual FDI Flow in Bangladesh

Target Actual

Note- FDI target was set since 2003

4.2. Bangladesh –an Investment Destination in South Asia & Factors

Attracting FDI in Bangladesh:

Bangladesh is virtually located as a bridge between the emerging

market of south Asia and fastest growing markets of South East Asia and ASEAN

countries. The geographical-economical location of Bangladesh indicates its

history of being a nation of traders and suppliers. Bangladesh is poised to become

a regional hub where activities relating to assembling, manufacturing, trading and services, would be some of the areas that are picking up over the years.

The following facts deserve attention in relation to assessment of

Bangladesh as an investment destination:

Bangladesh has never defaulted in its debt-service liabilities to its

donors.

Bangladesh never experienced negative growth during last three

decades.

Page41



The frequency and intensity of natural disasters are far less in Bangladesh than the other south Asian countries.

Bangladesh exports readymade garments, knitwear, walking shies,

leather goods, pharmaceutical, shrimp & frozen foods, vegetables, jute

& jute products etc to sophisticated markets of EU, USA, Japan, and

many other countries.

The cost of production especially cost of labor both skilled and semi-

skilled is comparatively lower.

Cost of living is also quite low and reasonable and there is no communal

or ethnic problem.

English language is widely spoken and understood.

The economy is opened up with rapid liberalization of import policies

helping globalization of the economy.

“The 15th Survey of Investment –Related Cost Comparison in Major Cities and

Regions in Asia” conducted by Japan External Trade Organization (JETRO) in

March 2005 found that the ‘The investment cost in Bangladesh has become

cheaper compared to the last year and Bangladesh succeeded to develop herself

as more competitive than other countries which are potential from the investment point of view to foreign investors.’

A recent World Bank published report entitled

“Bangladesh: Growth and Export Competitiveness” acknowledges that during

‘90s, Bangladesh was ranked 11th best performer amongst 62 low income

countries in terms of cross country per capita growth comparison. Following key

features are the testimony of such success:

Consistent GDP growth of 5% plus for the last years.

Significant FDI growth since 2003.

Steadily rising export earning nearing US$ 10 billion. Continuously increasing share of private investment as % of GDP to

18.5 in FY 2005.

Striking manufacturing growth expecting to achieve 10% in FY 2006.

4.3. Doing Business: Costs & Other Aspects:

Page42



Cost of doing business is a significant indicator of

competitiveness. In JETRO study, when arranging the order of 21 cities

according to each of the 34 cost components including Office rent, Taxation on

Remittance of Profit etc. Furthermore, comparing to other last years, the relative

position of Bangladesh against the components like Rental Fee in Industrial

Estates, Charge for overseas, Telephone Call, Cost of Water foe General use,Cost of Petrol etc, has been improve. JETRO views that the mean order of all

components has risen to 3.01 from 3.06 indicating a very small elevation which

means Dhaka has become a little more cost- competitive from the viewpoint of

investment costs.

The recently published World Bank and IFC report entitled “doing Business in 2006: creative jobs” ranked Bangladesh in the 60 th position

globally and 4th in the SAARC in the Ease of Doing Business Ranking. Following

is a comparative ranking scenario as prepared by the World Bank-

Table -4.7 Rank Country

1 New Zealand

20 Thailand

31 Maldives

55 Nepal

60 Pakistan

65 Bangladesh

75 Sri Lanka

104 Bhutan

99 Vietnam116 India

122 Afghanistan

*Source: Doing Business in 2006: creating jobs, world bank, 2006

Infrastructure Facilities:

Infrastructure deficiencies are the primary deterrent to

economic growth in Bangladesh. Long years of under-investment has taken a toll

and resulted in poor access to basic infrastructure for a large part of

Bangladesh's population. Since Bangladesh opened its gas and power sectors for

private investment, there has been a strong response from international energy

developers.

The World Bank provided funding (US$235million) and

technical assistance to promote greater private sector participation in power,

gas, water supply, telecommunications, and transportation under private sector

Page43



infrastructure development project. The credit is provided by the International

Development Association, the World Bank's concessionary lending arm.

4.3.1. Transportation:

An adequate and efficient transport system is a pre-

requisite for both initiating and sustaining economic development.Investment in improving transport efficiency is the key to expansionand integration of markets - sub-national, national and international.It also helps the generation of economies of scale, increased competition, reduced cost, systematic urbanization, export-led faster growth and a larger share of international trade. The transport systemof Bangladesh consists of roads, railways, inland waterways, two sea ports, maritime shipping and civil aviation catering for both domesticand international traffic. Presently there are about 21,000 km of paved roads; 2,706 route-kilometres of railways (BG-884 km and MG-1,822 km); 3,800 km of perennial waterways which increases to

6,000 km during the monsoon, 2 seaports and 2 international (Dhakaand Chittagong) and 8 domestic airports.

4.3.2. Power and Energy

To meet the growing demands of electricity in the domestic

and industrial sectors, Bangladesh will have to come up with a plan for

massive production of power. The prospect of using natural gas to generate

electricity is pretty bright for Bangladesh. Other possible means of alternative

sources of energy include wind power, hydroelectric power, tidal power, solar

power, and nuclear power.

4.4. Incentive offered by Govt. of Bangladesh:

The government of Bangladesh has recently made and

implemented a number of policy reforms with a view to bringing about socio-

economic emancipation of the natio .

The major policies and incentives for FDI:

Non–discriminatory treatment between foreign and local investment and

the protection of foreign investment from expropriation by the state, and ensuring the proceeds from sale, and the repatriation of shares and profit.

Foreign entrepreneurs enjoy the same facilities as the domestic

entrepreneurs in respect of tax holiday, payment of royalty, technical know-

how fees etc.

Page44



For foreign investment, there is no limitation pertaining to equity

participation, i.e., 100 percent foreign equity is allowed.

Permanent resident ship for foreign nationals investing more than US $

75000 or equivalent amount.

No obligation to sale shares through public issues irrespective of the

amount of paid up capital.

Obtaining working capital loan equivalent to equity amount.

Tax holiday facilities are available for 5 or 7 years depending on the

location of the industrial enterprise.

Tax exemption on royalties, technical know-how fees received by any

foreign collaborator, firm, company, and expert.

Tax exemption on the interest on foreign loans under certain conditions.

Avoidance of double taxation in case of foreign investors on the basis of

bilateral agreements. Bilateral agreements have been concluded by the

Bangladesh government with the following countries Japan, Italy, Singapore,Sweden, Republic of Korea, United Kingdom (including Northern Ireland),Canada, Malaysia, Romania, Sri Lanka, France, Germany, Indian Pakistan.

Tax exemption on income of the private sector power generation

company for 15 years from the date of commercial production.

Concessionaire rates of duty for import of capital machineries and spare

parts.

50 percent rebate for taxable income generated from export earnings.

Export-oriented industries are exempt from paying local taxes such as

municipal tax.

Income tax exemptions for export earnings from handicraft and cottageindustries.

Additional Incentives for EPZ Industries:

Page45



In addition to the incentives and facilities available to industries ingeneral, the industries in the Export Processing Zones are allowed to enjoy the following facilities:

● Freedom from National Import Policy restrictions

● offshore banking facilities;

● Back to back letter of credit facility for certain types of industries

for import of raw materials;

● Availability of food stuff and beverage on payment of nominal tax

for foreigners working in EPZ; Exemption of customs duties and sales tax on imported motor vehicles for executive of enterprises;

● All customs formalities, within EPZs.

*Source:asiatradehub.com

4.5. Guarantees through Multilateral Agencies:

Bangladesh is a signatory of HIGA (Multilateral investment Guarantee Agency), OPIC (Overseas Private Investment Corporation) of Americaand ICSID (International Centre for Settlement of Investment Disputes).

» MIGA is the Multilateral Investment Guarantee Agency of the World Bank

group to encourage the flow of foreign direct investment (FDI) to, and among,developing member countries. MIGA's guarantee protects investors against losses arising from the risks of currency transfer, expropriation and war and civil disturbances. MIGA may only ensure new investment, privatization and financial restructuring.

» OPIC is the most important US government agency which is in a position

to promote greater investment interest in countries including Bangladesh by providing loan financing and investment insurance to American investors

» The ICSID is an international organization established for the settlement of

investment disputes between states and nationals of different states. ICSID seeksto encourage greater flows of international investment by providing facilities for the conciliation and arbitration of disputes between governments and foreigninvestors.

4.6. Foreign Investment Protection Act:

Page46



The Foreign Private Investment (Promotion and

Protection) Act, 1980 provides for fair and equitable treatment to foreign private

investment. It ensures legal protection to foreign investment in Bangladesh

against nationalization and expropriation. It also guarantees repatriation of

capital and returns from it and equitable treatment with local investors with

regard to indemnification compensation etc., in the event of loss due to civil commotion etc. Similarly, adequate protection is available for intellectual

property rights, such as patents, designs, trade marks and copyrights.

*Source:asiatradehub.com

4.7. The magnitude of FDI Flow in Bangladesh:

Table 4.1 shows total FDI inflows over the past one decade

(including EPZs). The information reveals that in 1999 there was a sudden fall in

FDI, and again in 2001; afterwards it stabilized but remained below the average

reached during the 1997-2000 period. In spite of Bangladesh’s comparativeadvantage in labour-intensive manufacturing, execution of investment friendly

policies and regulations, establishment of EPZs in different suitable locations and

other privileges, FDI flows have failed to accelerate.

Table 4.7.1. : Aggregate and Sector-wise FDI inflow, 1996-2006(USDin million)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 200

Agriculture &Fishing

0 0.3 1.4 1.4 2.9 15.2 1.1 1.6 4.1 1.7 2.4

Power, Gas & Petroleum 3.2 47 242.1 235.2 83.5 301.1 192.4 57.9 88.2 124.1 208

Manufacturing 45.5 89.1 162.4 139.8 191.7 193.5 132.2 143 165 139.5 219

Industry (Total) 48.7 136.1 404.5 375.0 275.2 494.6 324.6 200.9 253.2 263.6 427

Trade &Commerce 41.3 92.3 158.9 164.3 27.5 53.2 27.6 63.7 44 66.6 130

Transport andTelecommunication

1.7 1.5 5.9 25.3 0.5 5.4 0.9 48.5 45.9 127.5 284

Other Services 0.5 1.6 4.7 10.5 2.8 10.3 0.3 13.7 3.1 1.1

Services (Total) 43.5 95.4 169.5 200.1 30.8 68.9 28.8 125.9 93 195.2 415

Total FDI toBangladesh

92.3 231.6 575.3 576.5 309.1 578.6 354.3 328.3 350.2 460.4 845

*Source : Statistics Department, BB

Page47



The first major compositional shift was within manufacturing from import-

substitutes to export oriented manufacturing. A more recent shift of FDI has been

towards services. These global changes are also evident in Bangladesh economy

and have been driven in particular by the opening up of service industries to FDI. Foreign Direct Investment began entering trade sectors in the early nineties. With

the country’s accession to the World Trade Organization (WTO), service sectors

like Power and energy, bank, insurance, telecommunications and other sectors

are being liberalized and progressively opened in Bangladesh.

Table 4.7.1a :Growth Pattern

(agriculture sector)

Year FDI inflow(USD inmillion)

AgricultureSector growth(percentage)

1995-96 0 3.11996-97 0.3 5.9

1997-98 1.4 3.2 1998-99 1.4 4.7

1999-00 2.9 7.42000-01 15.2 3.1

2001-02 1.1 0.01

2002-03 1.6 3.1

2003-04 4.1 4.1

2004-05 1.7 2.2

2005-2006 2.4 4.0 * Source : Statistics Department,BB & Bangladesh Economic Review 2006

* The growth percentage is calculated by statistics department by Bangladesh

and still not calculated for year 2005-2006

It is evident that inflow of FDI in agriculture sector does not

necessarily has any impact on the growth trend of agriculture sector . This can

also be shown in a chart below:

Graph-4.2

Page48



FDI inflow & growth rate(agri)

0

2

4

6

8

10

12

14

16

1995-

96

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

F D I i

n f l o

0

1

2

3

4

5

6

7

8

FDI inflow in agri (USDin million) Sectoral growth (percentage)

Table 4.7.1b :Growth Pattern

(Industrial sector)

FDI inflow

(USD inmillion)

Sectoral

growth(percentage)

1995-96 48.7 6.9

1996-97 136.1 5.8 1997-98 404.5 8.3

1998-99 375 4.9

1999-00 275.2 6.2

2000-01 494.6 7.4

2001-02 324.6 6.5

2002-03 200.9 7.3

2003-04 253.2 7.6

2004-05 263.6 8.32005-2006 427.5 8 .5 Source : Statistics Department,BB & Bangladesh Economic Review 2006

* The growth percentage is calculated by statistics department by Bangladesh

and still not calculated for year 2005-2006

Page49





Source : Statistics Department, BB & Bangladesh Economic Review 2006

* The growth percentage is calculated by statistics department by

Bangladesh and still not calculated for year 2005-2006

The higher growth trend in service sector is achieved due

to recent FDI inflow in telecommunication, banking and power and energy sector.

This is shown in the chart below:

Graph 4.4

FDI inflow &growth rate (service)

0

50

100

150

200

250

1995-

96

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

F D I i n f l

0

1

2

3

4

5

6

7

FDI inflow in service(USDin million) Sectoral growth(percentage)

Now, we will look at the investments of various countries

in Bangladesh in year 2005-2006.

Table 3.7.2. Country wise Sources ( by region &

economics) of Foreign investment

Country FDI (Million US $)Year 2005-2006

Country FDI (Million US $)Year 2005-2006

UK 152.8 UAE 55.5

China 11.4 Pakistan 25.5 Switzerland 2.3 France 1.7

Canada .7 Denmark 18.3

S. Korea 29.9 Sri Lanka 4.1

India 2.7 Hong Kong 53.1

USA 141.8 Thailand .2

Singapore 97.5 Singapore 97.5

Netherlands 15.4 ADB 12.7

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Japan 46.4 IFC 31.7

S. Arabia 1.0 Egypt 48.4

Germany 1.6 Norway 53.5

Taiwan 11.4 Malaysia 33.1

UAE 55.5 Others .5

Pakistan 25.5

Graph 4.5

FDI (Million US $)Year 2004-2005

152.8

11.42.30.729.92.7

141.8

97.5

15.446.411.611.455.5

25.51.7

18.34.1

53.1

0.2

97.5

12.7

31.7

48.4

53.533.1 0.5

UK

China

Switzerland

Canada

S. Korea

India

USA

Singapore

Netherlands

Japan

S. Arabia

Germany

Taiwan

UAE

Pakistan

France

Denmark

Sri Lanka

Hong Kong

Thailand

*Source: Enterprise survey conducted by Bangladesh Bank

Investment in Export Processing Zones (EPZs): Bangladesh started with EPZ in public sector during the early

eighties with the enactment of the Bangladesh Export Processing Zone Authority

(BEPZA) Act 1980’ on 14th April 1981, which paves the way to establishing

special zones for both domestic and foreign investment, managed by public sector.

After 15 years, a separate law ‘ The Bangladesh Private Export Processing Zones

Act 1996’ was passed in 1996, inviting private sector for establishing special

zones for investment. Fully foreign-owned investments, joint ventures and wholly

owned domestic companies are all permitted to operate and enjoy equal

treatment in the EPZ. Table : 4.7.3 : EPZ’s investment USD in million

Year Investment inEPZs

1994-95 35.93

1995-96 30.58

1996-97 53.9

1997-98 68.83

1998-99 71.61

1999-00 34.98

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2000-01 48.4

2001-02 55.7

2002-03 102.63

2003-04 115.05

2004-05 118.52

2005-06(up to

April'06) 84.97 Source : BEPZA

Investment in EPZs

35.9330.58

53.9

68.83

71.61

34.98

48.4

55.7

102.63

115.05

118.52

84.97

1994-951995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06(up toApril'06)

*Source: BEPZA

4.8. Massive Boom of Foreign Investment in Bangladesh:

Bangladesh has experienced a boom in foreign investment

in the country over the last two years. The county will get up to $1 billion foreigndirect investment within 2006 and expected to more inflow of fund.

In 2004 foreign cash flowing into the country reached $530

from $440 million despite political instability and natural disasters. In 2006 it

target to get minimum of 2 billion. Why more companies were looking to dobusiness in Bangladesh – the simple answer is a minimum cost of production is

ensured here. A country of 140 million people, Bangladesh is a free market

economy that has experienced a more than 5% growth rate in recent years.

» Lafarge Surma Limited (Lafarge of France)- invested in productioncement with total of US$240 for a plant of dry process cement.

» Indian Tata group offer to invest of total of US$2 billion in steel industry,

1000 megawatt power generation project and in a fertilizer factory. This

would be by far the biggest FDI inflow by any company in the history of

Bangladesh.

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» Recently Dhabi Group, a UAE based company, has proposed to invest $2

billion in Bangladesh on telecom sectors, tourism & hotel sectors etc.

» An Egyptian telecom giant Orascom already has invested $ 150 millionin Bangladesh’s mobile phone sector.

» US oil company UNOCAL already a player in Bangladesh energy

industry to set up a $200 million methanol plant.

Except these, there are many more investors who are interested to invest in

Bangladesh because according to business analysts, Bangladesh as one of the

Asia’s most attractive business places where return to investment in many cases 3

to 4 times higher than many other South Asian or South East Asian countries.

4.9. Major Impediment to Inflow of FDI:

Despite the FDI friendly policies of the government and a

culture of hospitality to foreigners, FDI records in the country in terms of the

number of projects implemented- as compared to those officially registered- is

frustrating. Of the 365 FDI projects registered during 1996-1998 only 72 went

into production in end of 1999 while remaining 266 languished only as file cases.

Even Tata Group’s proposal is hanging for years. Problems that have restricted FDI potentials in the country include the following:

» Excessive bureaucratic interference

» Alleged irregularities in processing papers

» Inordinate delays in selecting project for feasibility studies.

» Frequent changes in policies on import duties for raw materials,

machinery and equipment etc.

» Overlapping administrative procedures and absence of a transparent

system of formalities often confuse not only investors proposing projects

but also staff and personnel assigned for discharging procedural

responsibilities.

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» Frequent transfers of top and mid level officials in various ministries,

directorates and departments affect continuity and prevent timely

implementation of strategic procedural and even routine duties.

» Many foreign companies feel disturbed and ultimately are discouraged by

disruptions in the production processes in the country because of frequent

power failures, poor infrastructure support and labor and political unrest.

» Lack of professional personnel. – The technical, managerial and

innovative skills in the country needed to efficiently handle

entrepreneurial function including risk taking and planning and

coordination and control.

» Political instability including frequent hartals, poses as the real hazard.

As well corruption, frequent policy shift, lack of stability and

good governance, labour strike in recent times are giving wrong signals to prospective investors to invest in the country. Worsening law and order situation

and sense of insecurity are being regarded as major problems for the foreign

investors inside and outside the export processing zones, where such investors do

mostly concentrate.

4.10. Coordinating agent of FDI in Bangladesh:

4.10.1. Government Organization:

¤ BOI (Board of Investment )

For promoting and accelerating private investment in Bangladesh the government

established BOI in 1989. The board, Headed by the Prime Minister represented by

Ministers and Secretaries of concerned ministries, public representatives and

private sector personnel vested with necessary powers to take decisions for

speedy implementation of new industrial projects and provide operational support

services to the existing ones.

¤ BEPZA ( Bangladesh Export Processing Zones Authority)

To assist the establishment of export oriented industries Export Processing Zones

have been created under Bangladesh Export Processing Zones Act-1980. it is a significant step in attracting foreign investment. Entrepreneurs are not required

to go to different offices to get the thing done. Sanction of project, issue of work

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permits, and provision of various utilities like gas, water, electricity and

telecommunications are directly taken care of by the BEPZA.

4.10.2. Bank and Financing Institutions

To facilitate investor’s business transactions and establish moreindustries in our country a good number of national, private and foreign

commercial banks having a network of correspondents and branches are

operating all over Bangladesh and abroad. At present the following banks and

financing institutions are providing service in the Country.

Financing institutions: Major financing institutions are Bangladesh Krishi

Bank, Bangladesh Shilpa Bank, Bangladesh Shilpa Rin Sangstha, Bank of

small Industries and Commerce, Investment Corporation of Bangladesh,

Rajshahi Krishi Unnayan Bank etc.

Foreign commercial banks: Few of the important foreign commercial banks are, American Express Bank Ltd. AnZ Grindlays Bank Citi Bank N.A

Credit Agricole Indo-Suaz Dutch Bangla Bank, Faisal Islamic Bank of

Bahrain, Habib Bank, Hanil Bnk, Standerd Charterd Bank, HSBC Ltd. Hanvit

Bank etc.

INDUSTRIAL POLICY AND FLOW OF FDI IN BANGLADESH

For better understanding the trend to FDI, it is necessary to discuss the gradual

industrial policy in detail since the post-liberation period till the latest

development. In this section, industrial policy since post –liberation period and flow of FDI in Bangladesh are discussed.

A. Industrial Policy

The industrial policy during post liberation period was not flexible enough to

encourage FDI in Bangladesh. The gradual liberalization of industrial policy in Bangladesh started with the announcement of Industrial policy in Bangladesh

started with the announcement of Industrial Policy – 1982. This was followed by

successive reforms and amendments within the broad them of a liberalized and

competitive economy. The current industrial policy was announced in May 1999.

The industrial policy –1999 is based on the philosophy of free market economy.

The private sector has been recognized as the engine of growth Maximum

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Create possible opportunities for revitalizing and rehabilitating sick

industries.

Take appropriate measures for preventing environmental pollution and

maintaining ecological balance.

5. Latest Industrial Policy

In order to achieve the objective of accelerating industrial growth and to gain a

greater share of industry in the GDP as well as top make the industrial policy

responsive to the changes occurring in the global economy, the present

government announced the latest Industrial Policy- 1999. Salient features of this

policy are as follows:

To expand the production base of the economy by accelerating the level of industrial investment,

To promote the private sector.

To attract FDI in both export and domestic market oriented industries.

To generate female employment in higher skill categories.

To diversify and rapidly increase export of manufactures.

To encourage the competitive strength of import substitution industries for

catering to a growing domestic market.

To encourage balanced industrial development throughout the country by

introducing suitable measures and incentives.

To coordinate with trade and fiscal policies.

FLOW OF FDI IN BANGLADESH

Although Investment climate, Govt. policies are favorable for the foreign investors

in Bangladesh; unfortunately, FDI inflow in Bangladesh is not satisfactory. According to UNCTAD, in 2003 Bangladesh achieved only 0.05% of total global

FDI, whereas India enjoyed 0.9%, FDI in Vietnam was 0.52%, Indonesia 10.2%

and China 70% approximately.

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If we analyze the FDI in Bangladesh, most of the FDI has gone to the energy

sector. In manufacturing sector, FDI is not so high in manufacturing sector; the

cause may be is that the domestic market is not so big, and consuming capability

of quality goods is not satisfactory due to poor economic condition.

The recent data (till June, 2004) of industry, FDI and human resource in EPZs of

Bangladesh is shown in a table below:

IndustryTitle

No. of concerns

FDI(million US $) Human resource

Ready made garments 42 188.64 68322

Electronics 11 41.74 2410

Textile 20 166.40 15012

Metal works 11 16.52 1112

Lather & shoes 13 47.57 5388

Plastic 11 17.80 1212

Others 88 230.19 42450Total 196 708.86 135916

* Source- BEPZA

EPZInvestment

Ready madegarments

Electronics

Textile

Metal works

Lather &shoes

Plastic

Others

Figure: Table of FDI in fiscal year 2006-07 in Bangladesh.

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Tableof countrywiseFDI

UK

China

Switzerland

Canada

S. Korea

India

USA

Italy

Singapore

Australia

Netherlands

Japan

S. Arabia

Germany

Taiwan

Oman

UAE

Pakistan

France

Denmark

Sweden

Myanmar

Ireland

Kuwait

Sri Lanka

HongKong

Thailand

Part –V

FDI The Basic Policy Framework

As a developing country, Bangladesh needs foreign direct

investment (FDI), one of the important factors in the development process. By

definition, FDI comprises capital provided by a foreign direct investor, either

directly or through other related enterprises, where the foreign investor is directly

involved in the management of the enterprise. Until the1980s, most developing

countries viewed FDI with great weariness. In recent years, however FDI

restrictions have been dramatically reduced. Most countries offer incentives to

attract FDI, such as tax concessions, tax holidays, accelerated depreciation on

plants and machinery and export subsidies and import entitlements.

Since the early eighties Bangladesh opened its door and

welcomed foreign investors. The Government of Bangladesh enacted the ‘Foreign

Investment Promotion and Protection Act, 1980’ in an attempt to attract FDI.

FDI is allowed in every sector of the economy except in five industries reserved

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for the public sector: defence equipment and machinery-arms ammunition,

production of nuclear energy, forestry in the reserved forest area, security

printing and minting, and railways.

The major policies and incentives for FDI:• Non–discriminatory treatment between foreign and local investment and

the protection of foreign investment from expropriation by the state, and

ensuring the proceeds from sale, and the repatriation of shares and profit.

• For foreign investment, there is no limitation pertaining to equity

participation, i.e., 100 percent foreign equity is allowed.

• Foreign entrepreneurs enjoy the same facilities as the domestic

entrepreneurs in respect of tax holiday, payment of royalty, technical

know-how fees etc.

• Full repatriation of capital invested from foreign sources is allowed.

Similarly, profits and dividend accruing to foreign investment may be

transferred in full. If foreign investors reinvest their repairable dividends

and or retain earnings, those will be treated as new investment. Foreigners

employed in Bangladesh are entitled to remit up to 50 percent of their

salary and will enjoy facilities for full repatriation of their savings and

retirement benefits.

• Work permits are issued to foreign experts on the recommendation of

investing foreign companies or joint ventures.

• Intellectual Property Rights of new products and process are protected.

• Investment guarantee and dispute settlements are guided by international

arrangements and provisions.

• Tax holiday facilities are available for 5 or 7 years depending on the

location of the industrial enterprise.

• Industrial undertakings not enjoying tax holiday will enjoy accelerated

depreciation allowance.

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• Tax exemption on royalties, technical know-how fees received by any

foreign collaborator, firm, company, and expert.

• Tax exemption on the interest on foreign loans under certain conditions

• Avoidance of double taxation in case of foreign investors on the basis of

bilateral agreements.

• Tax exemption on income of the private sector power generation company

for 15 years from the date of commercial production.

• 6- month’s multiple entry visa for the prospective new investors.

• Concessional rates of duty for import of capital machineries and spare

parts

• Duty drawback on exportable and potentially exportable goods.

• 50 percent rebate for taxable income generated from export earnings

• Income tax exemptions for export earnings from handicraft and cottage

industries.

Besides, the new Industrial Policy of 1999, the Companies Act 1994 and the

Telecommunications Act 2001 pave the way for Foreign Direct Investment into the

country. Trade Policy has also been liberalized significantly over the last decade.

Following the Bangladesh’s accession to the WTO in 1995, FDI in service sector

particularly in Banks and telecommunication has been increased.

FDI associated outward remittances :

FDI brings much-needed foreign funds for current

investment, but it also creates long-term debt obligations in the form of future

repatriation of profit earned by the foreign investor. Another aspect is the round tripping of capital that sees domestic capital reinvested as FDI, because of

discriminatory taxation policy that favours FDI over domestic investment.

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Table 5.6 shows the possible repatriation of foreign exchange in the form of

dividend, profit, capital repatriation, private debt re-payment and family

maintenance for the last one de

Table 5.6 FDI Related Outward Remittances

( in million USD)

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Dividend/Profit Repatriation

19 18 26 40 83 149 175 195 355 338 418

Investment Liquidation/Capital Repatriation

0.3 0.6 0.1 2.9 0.5 0.5 2.6 2.2 10.5 3.3

Private Debt

amortization

20 34 84 53 168 227 188 243 229 372 208

Family Maintenance 0.99 0.74 1.41 1.56 1.92 2.43 1.84 2.82 4.19 4.72 2.58

Total Outward Flows40.29

52.74112.01

94.66 255.82

378.93

365.34

443.42 590.39 725.22631.88

Annual FDI inflow 92.3 231.6 575.3 576.5 309.1 578.6 354.3 328.3 350.2 460.4

Net Annual Balance* 52.01

178.86

463.29

481.84

53.28199.6 7

-11.04-115.12

-240.19

-264.82

*Here balance means inflow minus outflow Source : Statistics Department , Bangladesh Bank

cade.

The above table shows that Foreign investors have taken out more money

than they have pumped into Bangladesh particularly in the new millennium ( from 2001

the net balance i.e inflow minus outflow is negative) through repatriation of

profit/Dividend, capital and repayment of loans with foreign banks/sources. The data

shows that between 1995 and 2000, the country enjoyed a higher rate of FDI inflow with

a lower outflow of profit and loan repayment. But the year 2001 and afterwards, the

trend has become reverse, i.e the investors remitted more (as profit/dividend, capital

repatriation, loan repayment) than their investment. This is happened because, out of

several hundred foreign investors in the country, a few mobile phone companies

dominate this outflow of money/resources in the new millennium, followed by oil and gas

companies and foreign banks.

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The debate on the impact of FDI:

It is commonly agreed that FDI has been beneficial to capital

formation, output, income and export growth. FDI contributes to economic growthby augmenting the resources available for capital formation and by increasing

export earnings. From the correlation matrix result, we found that the

contribution of FDI in the growth and development of industry and service sector

in Bangladesh is positive(Table 4.5.3 & 4.5.4). FDI has also contributed greatly

to the upgrading of the Bangladesh export (Table- 4.5.5) base. Another research

[Huang (1995)] found that FDI had led to the introduction of advanced

technology. However, many others have argued that relatively little advanced

technology has been transferred.

FDI is playing an important role in the economic development of

Bangladesh in terms of capital formation, output growth, technological progress and

exports. Nevertheless, concerns remain about the possible negative effects of FDI

including problem of monopoly, technology dependence, and capital flight and profit

outflow. This facts have been revealed from the above mentioned data and correlation

matrix. As we have seen from the growth pattern of industry and service sector, which is positively correlated with the FDI inflow, investment in the service sector is not

discouraging. It has a linkage effect on the economy. But the Government should take

measures to slash the profit outflow, for instance, it could make it mandatory for the

investors to float shares in the stock market. Particularly at present ,in Bangladesh, FDI

in telecom and oil, power and energy sector and also in composite RMG sector gets an

strong institutional shape in last one decade. And necessary infrastructure has already

been build in this line of investment.

Part –V FDI The EmpiricalAnalysis

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6.1 History of FDI:

In the years after the Second World War global FDI was dominated by the United States,as much of the world recovered from the destruction brought by the conflict. The US

accounted for around three-quarters of new FDI (including reinvested profits) between1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, nolonger the exclusive preserve of OECD countries. FDI has grown in importance in theglobal economy with FDIjkjkj stocks now constituting over 20 percent of global gdp.

6.2 Types of FDI:

1. By Direction

• InwardInward foreign direct investment is when foreign capital is invested in local resources.

• OutwardOutward foreign direct investment, sometimes called "direct investment abroad", is whenlocal capital is invested in foreign resources.

2. By Target

• Greenfield investmentDirect investment in new facilities or the expansion of existing facilities. Greenfieldinvestments are the primary target of a host nation’s promotional efforts because theycreate new production capacity and jobs, transfer technology and know-how, and can

lead to linkages to the global marketplace.

• Mergers and AcquisitionsTransfers of existing assets from local firms to foreign firms takes place; the primary typeof FDI. Cross-border mergers occur when the assets and operation of firms from differentcountries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreigncompany, with the local company becoming an affiliate of the foreign company.

3. Horizontal FDI

Investment in the same industry abroad as a firm operates in at home.

4. Vertical FDI

• Backward Vertical FDIWhere an industry abroad provides inputs for a firm's domestic production process.

• Forward Vertical FDIWhere an industry abroad sells the outputs of a firm's domestic production.

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5. By Motive

FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm:

6. Resource-SeekingInvestments which seek to acquire factors of production that are more efficient than thoseobtainable in the home economy of the firm.

7. Market-Seeking

Investments which aim at either penetrating new markets or maintaining existing ones.FDI of this kind may also be employed as defensive strategy; it is argued that businessesare more likely to be pushed towards this type of investment out of fear of losing amarket rather than discovering a new one.

8. Efficiency-Seeking

Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested thatthis type of FDI comes after either resource or market seeking investments have beenrealized, with the expectation that it further increases the profitability of the firm..

9. Strategic-Asset-Seeking

A tactical investment to prevent the loss of resource to a competitor. Easily compared tothat of the oil producers, whom may not need the oil at present, but look to prevent their competitors from having it.

6.3 What is a Quality FDI?:

‘Quality’ to mean the effect of a unit of FDI on economic growth. However, this isdifficult to establish because it is a function of many different country and projectcharacteristics which are often hard to measure. Hence, it can be differentiated in manyways:

• First, we look at the possibility that the effects of FDI differ by sector.

• Second, we differentiate FDI based on objective qualitative industrycharacteristics including the average skill intensity and reliance on externalcapital.

• Third, we use a new dataset on industry-level targeting to analyze quality FDI

based on the subjective preferences expressed by the receiving countriesthemselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity.

In addition to supplying capital, FDI can be a source of valuabletechnology and know-how and foster linkages with local firms that can help to jumpstartan economy. However, despite the strong conceptual case for a positive relationship between economic growth and FDI, the empirical evidence has been mixed. While

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academics tend to treat FDI as a homogenous capital flow, policy makers, on the other hand, seem to believe that some FDI projects are better than others. UNCTAD’s WorldInvestment Report 2006 for instance describes “quality FDI” as “the kind that wouldsignificantly increase employment, enhance skills and boost the competitiveness of localenterprises.” Policymakers from Dublin to Beijing have implemented complex FDI

regimes with a view to influencing the nature of the FDI projects attracted to their shores.Chinese officials have openly stated that the new challenge for the country is to attractmore “high quality foreign direct investment.”

6.4 Influence of FDI:

Globalization demands more rapid adjustment and strategic positioningof not only countries but also regions, so that they are not left to lag behind or decline inthe process. In the new economic environment, policy-makers are helping build dynamicand flexible regions and cities. They also assist the transition from individual closed localeconomic systems to a new, open global system. To do this properly, it is important to

“think globally and act locally”. FDI has a role to play, particularly in terms of localeconomies’ establishing and enhancing links with the world economy. Not only can FDI bring capital, technology, know-how, jobs and exports, but it also induces further domestic investments. Today, countries and regions within countries face strongcompetition for attracting FDI.

Foreign investment often targets the most dynamic regions in the world,notably highly urbanized areas so that only part of this flow is directed towards peripheralareas. Investments in outlying regions generally aim at establishing productionsubsidiaries mainly to take advantage of low labour costs, while investments with higher potential for research and innovation have primarily been located in urbanized regions.

6.5 FDI in Bangladesh: Some Case Studies:

ASIA ENERGY AND THE PHULBARI OCCURRENCE:

Coal was first discovered at Phulbari during surveying and drilling in 1994-1997 by the Australian mining company BHP, which entered into provisional licensingand investment agreements with the Government of Bangladesh. The present energyadviser to the government of Bangladesh has said that the people who were involved insigning the agreement "should be tried." The agreements were assigned to the newlycreated Asia Energy PLC in 1998. Since 1998 the price of coal has more than tripled.

Asia Energy PLC was staffed at the top with executives from Australianmining giant Rio Tinto. Barclay's Global Mining and Metals provided the Chairman of the Board (and Barclays Capital took 2.1 million share options). Asia Energy PLC'schief brokers are JP Morgan Cazenove, leading a pack of investors that includes FidelityTrust, UBS AG, Cambrian Mining, RAB Capital, Goldman Sachs, and Credit Suisse.

Some 48 million shares were floated in 2004, rocketing up to a price of 900 pence a share by March 2005, for a total market capitalization of over $800 million, six

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http://www.countercurrents.org/bangla-anu220906.htm

http://www.countercurrents.org/bangla-anu220906.htm



months before the Department of Environment of the Government of Bangladesh grantedEnvironmental Clearance for mining on 11 September 2005. Asia Energy envisioned a$1.1bn (£578m) investment and was negotiating for backing from the AsianDevelopment Bank and the US Ex-Im Bank. Asia Energy estimates that Phulbari reservehas 572 million tons of high-quality coal located at varying depths between 140 meters

and 300 meters. The company targets annual production of 15 million tons of coal for 30years, 12 millions to be exported. Mining is to be by the relatively inexpensive open-pit process, ripping off the covering hundreds of meters of soil and rock and extracting thecoal. Bangladesh would receive, once sales were under way, a six percent royalty.

Far from the feverish speculation in the shares of Asia Energy on theLondon exchange, the real costs of the proposed project began to be recognized in thePhulbari region. The company itself acknowledged that no less than 40,000 peoplewould be involuntarily "resettled" and 10,000 hectares, primarily of fertile agriculturalland, would be required for the mine and associated infrastructure. Other estimates, based on the census records of local government units, suggest over one lakh [hundred

thousand] would be evicted. The issue is further complicated by the fact that many of those who will be displaced -- the exact figure is disputed -- are members of the Santalindigenous tribal people. Like most tribal groups in South Asia, they do not have anyland deeds or other documents proving ownership of their land, but their families havelived on it for centuries. Many of the Santals fear they will miss out on being re-housed because they do not have the paperwork. In addition the area whose water table would beaffected by the open-pit mining operation extends to over 600 sq km. The area is veryfertile, yielding three crops a year, and intensely populated. Protests began, and nofurther approvals were given. Nonetheless, Asia Energy PLC awarded contracts andsignaled its readiness to start full operation from 2008. But there was a terrible protest onAugust 26, 2006 a lot died on the day and ultimately the local people own and it was

stopped.

Much as JP Morgan Cazenove planned to strip off the fertile soil touncover the coal, the people of Phulbari have stripped off the cover of "FDIdevelopment" to expose the murderous reality underneath. And yet more important theyhave shown how, under present international conditions of growing oppositionworldwide to capitalist globalization, successful mass resistance is possible.

INVESTMENT FROM SAUDI PRINCE/S:

On August, 20006 Saudi Prine Bandar Bin Mohammed won the bid for SateOwned Rupali Bank’s 67.26% share for USD 330 million. Then one year passed by andthe final signing date of the sale and Purchase agreement passed by on may 2007 butSaudi Prince yet not have signed the Sale and Purchase Agreement. The sale was ondemand of the World Bank and International Monetary Fund, who demanded reforms inthe country’s banking sector as a condition for getting loans from them.

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At present the deal is yet postponed and due to this failure to complete thesale and purchase agreement the share prices of Rupali bank went down, which was shootup at the hearing of the Saudi Prince’s buying the Bank. The operation of Rupali bank also is in a stagnant situation. The Privatization Commission is trying to negotiate thedeal to close as soon as possible.

INVESTORS FROM INDIA: TATA ; MITTAL

Recently two Indian multinationals TATA and Mittal groupare interested to invest in Bangladesh’s different sector. Though thedeals with them are not finalized yet but there is a strong possibility of them to come to Bangladesh.

The biggest industrial conglomerate of India the Tata group has taken

initiatives for investment in Bangladesh. The signing of an Expression of Interest (EoI)

between the Tata group and the Board of Investment (BoI) on October 13 for US dollar 2

billion investment package, has paved the way for the biggest ever foreign private

investment in the country. Without considering national interest, Bangladesh government

is going to hold an agreement with Indian giant multinational TATA. If the agreement is

done with TATA, it would be worst & anti-people one. According to the proposed

agreement TATA would get gas, coal in subsidized price. The Indian giant would get it

for 20 years, regardless of price hike in national and international market.

TATA is planning to invest $2.5 billion in Bangladesh. By the by, we have

heard that it would create a large number of employment & $ 1 billion

increase in export capacity of home country. But what is most important to know how

much it would add to our national economy? Which is interesting, if local investors could

get natural gas same as the price of foreign investors, they could invest 15-20 thousand

crore taka. According to economists, if local investors get same opportunity they can

contribute 8 times higher than foreign investors.

TATA is saying that they could generate employment for 8,000 people,

while creation of 100,000 employments is possible for local investor’s at the same cost.

Companies from the Mittal group, a business conglomerate withextensive interests in India and overseas, plans to invest $2.9 billion in Bangladesh. It

would be the second largest investment after TATA.A Mittal Group delegation arrived to sign a memorandum of understanding (MOU) onthe investments, which include $300 million for mine development, $100 million for oilexploration and production, $500 million for power plants, $1.5 billion for petrochemicals and $500 million for liquefied natural gas (LNG) and related projects.The MOU was signed between the state-run Board of Investment (BOI) and Global Oil &Energy Limited, UK, an offshore investment arm of IIL owned by Pramod and VinodMittal, relatives of steel magnate Lakshmi Mittal. The Group will invest another more

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than $1 billion after the successful completion of these projects. They said their firm wasalso interested in investing in the power, steel and coal-mining sectors. The Mittal Grouphas investments in 27 countries in Europe, Asia, Africa and America.

INVESTMENT IN MOBILE PHONE SECTOR AND TRANSFER OF FOREIGN

EXCHANGE

In 1995, the Government of Bangladesh took a bold decision to open up the

mobile telecommunication for private sector operations. Since its inception Grameen

Phone has invested more than US$ 750 million. In 2004, out of total $660.8 million

foreign investment, $237 million was invested in the telecommunication sector, a share of

35.93% of the total FDI in Bangladesh.

As for example, Telenor of Norway got license in Pakistan and the bid

price is US$ 291 million. But the license fee is fixed here in Bangladesh & it’s only US$

16.5 million. But the call rate in Pakistan is Tk 3.50/minute and Tk 7/min.

With the scope of repatriation of profit, these companies remit huge

amount of money, creating additional pressure on the shaky foreign exchange reserve. In

a recent meeting Finance and Planning Minister Saifur Rahman told, ‘These cell phone

companies are minting money. They are remitting huge amount of money, putting

tremendous pressure on foreign exchange.’ These companies were supposed to bring in

foreign currency, Saifur observed. ‘Apart from giving dividends, they are buying

machinery and paying interests with our foreign currency.”

There is no doubt that Greenfield investments are better than portfolio

investment. However, even this relative benign type of FDI can upset a Balance of

Payment, when forex outflow obligations accumulate over time. Bangladesh is a net

capital exporter.

There exists a basic contradiction between the goals of poverty reduction

on the one hand and investor demands for lower taxes, lower wages, less regulation and

privatization of basic services on the other. FDI does not automatically generate positive

spillovers. Whether or not these take place depends on local conditions and the ability of

the host country to regulate and tailor FDI inflows. FDI leads to net capital outflows in

the long run. If capital import does not generate sufficient foreign exchange to service

foreign exchange obligations, the country will inescapably be at risk of a balance-of-

payments crisis.

Empirical evidences demonstrate that tight regulations on FDI did not, for

instance hamper the development of the US to an economic super power -on the contrary:

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regulation of FDI was an important condition, not to say a requirement, for ensuring

positive effects on its economic development. Investment competition is often connected

to harmful tax competition which erodes the tax base of the state and prohibits necessary

investments in infrastructure.

FDI which is connected to the privatization and the sale of public

utilities often contributes to poverty, since foreign investors have no interest in

maintaining a costly infrastructure for the poorer segments of society. FDI is especially

problematic in strategic industries. The best example may be the oil industry, which is

dominated by powerful TNCs such as Exxon, Shell, BP, etc. Another example is the

financial sector where the entry of foreign

banks and insurance companies is often associated with a reduction of credit for small

enterprises and a destabilization of the local banking system.

On the whole we can say that, there is no reason to share the high

expectations of the Monterrey Consensus, that FDI will contribute the missing resources

for poverty reduction.

FDI: BANGLADESH PERSPECTIVE:

Foreign Direct investment is an important determinant of the economicgrowth and development of Bangladesh. Empirical studies have shown that the creationof an adequate investment environment facilitates increased trade and investmentactivities which are crucial for long-term growth. Although attempts have been made tocreate an investment friendly climate, Bangladesh as a host country has yet to besuccessful in creating domestic policy settings and factors, hospitable to the facilitation of business. It is argued that both government ineffectiveness in controlling corruption,improving political stability and establishing rule of law and its failure to create physicaland policy infrastructure is the most influential determinant that have deterred foreigninvestors from choosing Bangladesh as a host nation.

Bangladesh initially adopted a policy of nationalization of all large andmedium industries. Consequently, there was no new inflow of FDI in the country until1977. Subsequent governments experimented with various industrial policies, but because of very uncertain political situation in the country, the FDI flows remainednegligible until 1993. Only 220 FDI units were registered in Bangladesh between 1977and 1993, but subsequently, FDI has experienced a fairly high annual growth. Thenumber of FDI units registered in the country during the period from July 1996 to May1999 was 425. The expected volume of total investments in these enterprises accountedfor Tk 288.8 billion. These created employment for more than 94,000 persons. Thisexpansion is attributable largely to the relative stability of economic policies and theestablishment of an improved political, social and economic environment. Sectors thatnow attract FDI are:

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Actual FDI Inflow during 2004: Distribution by Sources

Europian Union

18%

Other Western

Europe

27%

Africa

3%

West Asia

2%

South-East and

South East Asia

32%

Japan

5%North America

13%

a. Developed economies: Almost two-third (63.30%) of FDI in 2004 was originated fromthe developed economies, while the share of developing countries is 36.70%

• Western Europe is the largest regional source (45.22%) of FDI in Bangladeshduring 2004, which could be sub-divided into two - European Union (18.00%)and other Western Europe (27.22%).

• North America's investment amounts to 13.33% and other developed economies'share is 4.75%.

b. Developing economies: The developing region consists of Asia (33.61%) - the secondlargest source - that includes South, East and South East Asia (31.47%) and West Asia(2.14%). Africa also contributes 3.02% of FDI in 2004.

c. Source versus sectors: In general, investments from the developing countries aremanufacturingoriented.On the other hand, developed countries' investments are mostlyservice-oriented.

Mid-Term Strategic Plan 2003-06: FDI Target and Achievement

Under the Mid-term Strategic Plan (MSP) 2003-06, FDI target for the year 2006 was setat US$ 1.00 (one) billion. The target is based on the basis of annual growth of 35%during the subject period. Following Exhibit illustrates the year-wise FDI target and its

current achievement status in brief:

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FDI inflow in 2002 by components

Reinvestment,

35.58%

Intra-Company

Borowing, 23.67%

Equity, 40.76%

FDI Inflow in 2003 by components

Equity

45%

Reinvestment

42%

Intra-Company

Borowing

13%

FDI Inflow in 2004 by components

Equity

47%

Reinvestment

47%

Intra-Company

Borowing

6%

FDI Inflowgrowthbycomponents

Equity

Reinvestment

Intra-Company

Borowing

0%

20%

40%

60%

80%

100%

120%

140%

Growth(2002to2003) Growth(2003to2004)

Observation:

Significant growth in reinvested earnings and equity paints an

optimistic picture regarding investors' confidence at least for the

medium term.

Actual FDI Inflow during 2003: Distribution by

Sectors

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Actual FDI Inflow during 2004: Distribution by

Sectors

Textiles, 17.69%

Services, 66.76%

Enginering, 1.95%

Misce, 4.58% AgroBase, 1.37%

Food&Allied,

0.49%Chemical, 7.16%

Observations:

a. Service Sector:

Substantial inflow in the telecom and energy subsectors is the key

reason behind rise of service sector in FDI. Telecom represents 36%

of total FDI, while energy and power accounts for about 20%. As a

result of opening the PSTN telephony to the private sector, a

sustainable robust growth in the telecom sector is envisaged in the

coming years. Besides, existing cellular operators are also expectedto continue their investment program to firm up healthier market

position. The projected growth of the industry in the coming years

would require establishment of sufficient utility infrastructure like

energy and power to support the momentum. In view of this

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situation, more FDI and also local investment in these sub-sectors

are projected in the medium and long term.

b. Manufacturing:

The principal constituents of manufacturing sector are textile,

chemical and leather sub-sectors that represents about 88% of the

this significant sector. Textile continued to be the highest FDI

recipient in the manufacturing sector. Growth in the manufacturing

sector creates enormous employment opportunities. Table 3 shows

sectoral distribution of FDI in a more detailed approach.

c. Other manufacturing areas:

Agro-based, food & allied and glass & ceramics have also been

attracting FDI to a certain extent. Announcement of lucrative fiscal

incentive for agro-based sectors is expected to attract more FDI in the

short and term.

Top 5 FDI recipient sectors are (1) Telecom, (2) Energy & Power, (3) Textile, (4) Other services and (5) Chemical.

6.7 Attractions for FDI in Bangladesh:

FDI apparently does not have significant long-term impact on thetechnological base of the country because of concentration of FDI in relatively lowtechnology industries. Even in the case of industries where technological diffusion is possible, such as pharmaceuticals, operations have been confined mainly to bottling and packaging; only rarely has manufacturing come into the scene. A shift of FDI related

pharmaceutical industries from production of drugs to that of cosmetics, toiletries, pesticides, insecticides etc. allowed some transfer of technology through licensing,introduction of new processes, and training of local production and management staff. Inother FDI related sectors such as the electrical and engineering industries, investmentshave been predominantly in imports of components/parts for assembling rather than inreal manufacturing. External aid and donor agencies and foreign experts of local agentsof multinational companies traditionally play a significant role in decisions on choice of technology.

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Bangladesh has long been trying to attract FDI to support itsinternationalization process. Since the 1980s, the government of Bangladesh introducedopen door economic policy and implemented macro and micro economic reform programs to attract foreign investment. Consequently, Bangladesh has been experiencing

an upward trend in FDI inflow. However, by international standards, so far Bangladeshcould attract only an insignificant amount of foreign capital.

The investment plans in Bangladesh do not have appropriate built-inmechanisms for progressive development of technology capability in terms of research,engineering design, and local manufacture of the various components of plants,machinery and infrastructure.

Bangladesh invites FDI in joint ventures as well as in arrangements liketechnical licensing, counter trade, co-production agreements, management agreements,marketing assistance, turnkey operations, and combined turnkey and management

contracts. Incidences of technical collaboration are in evidence in sectors like cigarette,chemical and pharmaceuticals, electric goods , standard paints . Marketing collaborationhas occurred with sterling zone companies in the tea industry and in readymade garmentindustry. Licensing agreement is predominant in chemicals and pharmaceuticals sectors.A number of indigenous firms produce TNC brand products under license but withoutequity participation.

FDI in Bangladesh makes a direct contribution in terms of additions tothe investible funds and mobilisation of local resources for investments in manufacturing,trade and the services sectors. New investments, including FDI, generate additionalemployment, train local executives and workers, make thrusts into the export market,introduce improved technologies, open up new horizon for R&D expenditures, and aboveall, create new sources of tax revenue for the government. The contribution of FDI inemployment generation in the country however, is quite insignificant. FDI providesemployment to about 1.5% of the total industrial employment and less than 0.2% of thetotal working population of the country.

Bangladesh is a signatory to the Multilateral Investment GuaranteeAgency (MIGA) and the Overseas Private Investment Corporation (OPIC). This providesa guarantee to foreign investors against loss caused by non-commercial risks, the risks of currency transfer, war and civil disturbances. The foreign Private Investment (Promotionand Protection) Act 1980 ensures legal protection to FDI in the country againstnationalisation and expropriation and guarantees repatriation of capital and dividend.Also, the various types of insurance facilities offered by nationalised and privatecompanies seem to provide adequate facilities for coverage of operational risks.

The industrial policy of the government provides extensive incentivesand facilities to attract FDI in Bangladesh. These include tax holidays, concession inimport duty on machinery, repatriation of profits dividends, invested capital and capitalgain, and salaries of foreign personnel and exemption of tax on these incomes, exemption

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of export oriented industries from paying local taxes, up to 90% financing of the L/Cvalue of export products. The government has liberalised the trade regime andsignificantly reduced non-tariff restrictions. Foreign investors in Bangladesh have accessto domestic capital markets for working capital in the form of loans from commercial banks and development financial institutions. They also have access to the services of the

country's stock exchanges. Export-oriented industries of the thrust sector (toys, luggageand fashion articles, leather goods, diamond cutting and polishing, stationery goods, silk cloth, gift items, cut and artificial flowers and orchid, vegetable processing, andengineering consultancy services) are provided cash incentives, venture capital, and other facilities. The establishment of export processing zones (EPZ) proved to be an effectivestep in attracting FDI in Bangladesh and government permission to allow creation of private EPZs in the country has been a welcome decision.

The cultural environment in Bangladesh has a number of elements that can be identified as favourable for FDI. The population has a high degree of ethnic andcommunal harmony. Conservatism on religious grounds is not extreme and foreigners are

exempted from restrictions on this count. Major political parties of the country havealmost identical economic programmes. All of these favour liberalisation, which willenable the country to fit in the globalisation process.

Why invest in Bangladesh?

Bangladesh is a lucrative place for foreign investors. The country is rich in

natural resources like oil, gas, coal, water etc. A huge number of cheap labor forces are

another attraction for FDI. Government provides infrastructure facility, subsidized gas,

electricity, port facility etc. Main reasons are described below to invest in Bangladesh:

• 140 m population, 50 m civilian labor force

• trained and educated workforce at low wage rate

• sizeable domestic market

• steady growth of GDP

• stable rate of exchange

• low interest rate, low rate of inflation

• comfortable foreign exchange reserve

• Bangladesh has never defaulted in its debt-service liabilities to multi-lateral and

bilateral donors.

• Bangladesh never experienced negative economic growth during last 30 years of

its independence.

• Bangladesh has been remarkably successful in controlling populating growth

(from an average rate of 2.4 percent during 1980-90 to 1.5 percent in 2000)

• Bangladesh has the lowest import-tariff rate in the South Asian region;

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• The frequency and intensity of natural disasters is far less in Bangladesh than

those in the Philippines, Japan and even the USA. Bangladesh is located outside

the major earthquake zones.

Problems hindering FDI:

Problems that have restricted FDI potentials in the country include

• excessive bureaucratic interference,

• alleged irregularities in processing papers,

• lack of commitment on the part of local investors,

• inordinate delays in selecting projects for feasibility studies, and

• frequent changes in policies on import duties for raw materials, machinery andequipment.

Overlapping administrative procedures and absence of a transparent

system of formalities often confuse not only investors proposing projects, but also staff and personnel assigned for discharging procedural responsibilities. Many foreigncompanies feel disturbed and ultimately are discouraged by disruptions in the production processes in the country because of frequent power failures, poor infrastructure support,and labour and political unrest. An additional problem is the lack of professional personnel, i.e., the technical, managerial and innovative skills in the country needed toefficiently handle entrepreneurial function including risk taking, planning andcoordination and control.

Strategies to boost Export – a source of FDI

The government has taken following strategie to boost export:

· Simplification of export procedures and strengthening export-led co-operation throughreducing regulatory role of the government;

· Rationalization of the value of Taka to make the export trade more attractive;

· Creation of an Export Promotion Fund (EPF) for strengthening the export activities;

· Encouraging establishment of backward linkage industries through utilization of locallyavailable raw materials;

· Participation in international trade fairs, single country exhibitions and specialized fairsand sending business delegations abroad for expansion and consolidation of existingmarkets and creation of new markets;

· Expediting BMRE of existing wet-blue producing tanneries and converting them intofinished leather producing and exporting units;

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· Accelerating expansion of improved traditional and semi-intensive methods of shrimpcultivation for enhancing export off

· Allowing import of high quality foundation-tea for blending and establishing the brandname of Bangladesh tea through marketing;

· Taking measures to improve quality, increase production and expand market of exportable agricultural products;

· Undertaking activities for increasing export of computer software, engineeringconsultancy and services;

· Expediting steps for export of labour intensive electronic and engineering productskeeping in view the market requirements in the USA and other developed countries;

· Promoting export of electronic components and engineering items to various countries;

· Providing appropriate financing facilities for production of components of electronicand engineering items for marketing on consignment basis;

· Expanding the list of products under crash programme beyond 4 products (toys, luggageand fashion items electronic and leather goods) and including 8 more items such asdiamond cutting and polishing, jewelleries making, stationery articles, silk, gift items, cutartificial flower & orchid, vegetables, engineering consultancy & services for export;

· Organizing commodity-wise trade fairs of international standard in the country;

· Developing and expanding infrastructural facilities for export trade; and

· Creating product-development councils for important products.

Opportunities for the Foreigners

The Industrial Policy 1991 and its recently announced amendments, theassociated reforms in trade policies and fiscal and taxation policies now augur well for investment by the foreign nationals and companies and also non-resident Bangladeshinationals. No approval is required for any investment by the foreign investors in any

sectors of the economy except for a few areas (strategic ones) which are still reserved for public investment only. The foreign investment (promotion & protection) Act, 1980guarantees protection to foreign investment against nationalization and also guaranteesequitable treatment. Bangladesh is a signatory of Multilateral Investment GuaranteeAgency (MIGA) of the World Bank group, Overseas Private Investment Corporation(OPIC) and International Center for Settlement of Investment Disputes (ISCID) andtherefore, also gurantees investors protection against political and other risks. Followingfacilities are also available for foreigners and non-resident Bangladeshis:

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* Foreign investment with 100% foreign equity holding;

* Repatriation of all post tax dividends, capital, and capital gains is permitted fully;

* Employment of expatriate technical and professional personnel is allowed;

* Remittances of 50% of the salary of foreign nationals employed in local companies isallowed;

* Remittances of savings from earnings, retirement benifits, personal assets of individualsemployed in recognized industries on retirement/termination of service is allowed;

* Foreigners employed in recognized industries are exempted from income taxes for first3 years;

* Multiple entry visas are allowed;

* Relief is given from double taxation;

* Re-investment of reportable dividends is treated as new investment;

* Foreign investors have unhindered access to local banks and financial institutions for obtaining long term loans and working capital loans;

* Enterprises with foreign ownership may remain private limited companies. In the caseof public limited companies, the public offering of shares is optional;

* Foreigners are allowed to invest in shares and securities through stock exchange etc.

Foreign Investment Attraction: Role of BOI

Bangladesh wants to be an active partner in the world economic community.It is one of the most open economies among the developing countries. The Bangladesheconomy has already been liberalized extensively and it is vigorously pursuing a privatesector-led, export oriented growth strategy. The private sector has been accorded a predominant role in the country's development. Our policies are geared toward creating

an environment where the private sector can play its role effectively as the engine for economic growth. The present government has very clear and well defined economic policies, geared to promoting foreign direct investment. Like other developing countries,it actively encourage foreign direct investment in Bangladesh with a view to creating jobsfor our vast labor force, increasing its foreign exchange earnings, acquiring new andmodern technology and management skills, accelerating the overall growth anddevelopment of the economy and accessing new market. The present governmentwelcomes participation of foreign investors in our development efforts. To this end, the

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present government pledges good governance, functionally free convertibility of currency, developing export processing zones by both the public and the private sectorsand making BOl more responsive fo foreign investment. The government regards BOl asthe key organization in promoting foreign direct investment in the country. Thegovernment has also constituted a high powered committee to speed up the approval

process of the foreign investment proposals. The BOl has been given the responsibility tohelp and assist all domestic and foreign investors.

Private investment both local and foreign is welcome in all areas with theexception of only rive sectors on strategic grounds There is no restriction on the amountof investment or in the share of equity. Full 100 percent foreign investment and jointventure with local private partners or with the public sector is freely allowed. Foreigninvestors now enjoy the same treatment as provided to the domestic investors. Foreigninvestors are eligible to take advantage of a wide range of generous tax incentives, other fiscal incentives & facilities.

The standardised set of procedures required to be followed for FDI in anew venture in Bangladesh starts with meeting of the foreign investor with BOI member to communicate the investment proposal and submission of an application for registration. The BOI issues the registration letter after scrutiny and collection of clearance from the Department of Environment. The company is then asked to submit aMemo and Articles of Association for incorporation with the securities and exchangecommission and registration with Registrar of the Joint Stock Companies and also withthe Chief Inspector of Factories and Establishments. Upon completion of registrationformalities, the company can purchase and acquire land, construct factory and office premises, open letter of credit in any commercial bank for import of machinery andequipment and release of consignment at customs point. This apparently easy looking process however, is often difficult to put into practice. Foreign investors often find problems in infrastructure, law and order, and enforcement of contracts.

Role of FICCI:

Foreign Investors Chamber of Commerce and Industry (FICCI ) provides a platform tosecure the business interest of its members. It advocates at the highest level to avail the best business opportunities for foreign investors. The Chamber's social awareness alsoextends to the preservation of ecological balance. FICCI’s aim is to be an active participant in the growth of the nation's industrial and commercial base and to make anenduring contribution to the economic prosperity of Bangladesh.

They give concentration in the following areas :

• High priority is given to the vital industrial and agricultural sectors.

• Promote the creation of direct and indirect employment.

• Train the managers of the future and promote their skill development to thehighest levels.

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monitored by outside agencies which have a crucial impact on decisions of foreigninvestors. These agencies include the IMF and various private credit rating agencies.

6.8 Recommendations to improve the Scenario of FDI:

Quality of Bureaucracy and Governance

Bureaucracy of a country is entrusted with the important task of execution of public policy, management and delivery of public goods. Efficiency of a country’s bureaucracy has direct and indirect bearings on both domestic and external investmentflows. It has been identified by civil society representatives of Bangladesh, that thequality of the bureaucracy in Bangladesh is not conducive to generate dynamicinvestment flows. There is reform inertia, inefficiency, and red tapism in the governmentmachinery due to systemic distortions. Not only do the prevailing systems makeeverything slow, they also ultimately frustrate productive investment initiatives.

Improvement in Law and Order Situation

Overall law and order situation in Bangladesh is far from satisfactory.The use of ‘cadres’ by political parties gives rise to terrorist activities directly andindirectly. The business people are oppressed by the high incidence of toll extraction bythe political and local miscreants. Businessmen allegedly have to pay involuntary tolls at

almost every stage of business operations. All this increases cost of doing business andlowers business competitiveness. New investment in productive activities is heavilydiscouraged, because of the upfront involuntary tolls that have to be paid to themiscreants to start a new construction or new establishment. Peoples’ lives are not safeeither owing to the poor law and order situation.

Recommendations:

Law and order situation must be improved through appropriate reforms inlaw enforcement and the judicial system. Total overhauling of the police force is essentialin this regard. Special police forces may be created for proper enforcement of law and

order.Judicial reform is also needed so that litigation is settled in the shortest possible time andthe chances of criminals to go unpunished become minimum. Reforms should also bemade so that judicial responsibility of the police does not harm the activities of maintaining law and order and vice versa. Political parties should refrain from the use of ‘cadres’.

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Development of Infrastructure and Human Resources

A poor infrastructure facility is one of the prominent hurdles for investment in Bangladesh. Although there has been a modest improvement in the roadinfrastructure in the recent years, overall infrastructure facilities are still inadequate. The

country’s transport and telecommunication services are insufficient and severely under-developed. Inadequate power supply is another major problem. Many industrial unitslook for alternative sources of power resulting in higher operational costs. AlthoughBangladesh is a labour surplus country, there is a shortage of high-skilled manpower asdemanded by modern investors, particularly by the foreign ones. Industrial investment isfrustrated by the lack of required physical and social infrastructure.

Recommendations:

Bangladesh should invest more in physical and social infrastructure. Rapidgrowth in the power sector is a must. Telecommunication sector must be 20 u InvestmentPolicy in Bangladesh . An Agenda for Action expanded and modernised so as to supply

the growing demand for telecom services at internationally competitive costs. It should be able to provide support towards the development of information communicationtechnology (ICT). Higher education needs to be restructured so as to develop moreskilled manpower suitable for production and management activities at internationalstandards. A new education policy must be declared and implemented.

Improving the Port Services

Chittagong Port, the major seaport of the country, is one of the most cost

ineffective seaports in the world. A recent survey shows that the average turnaround timefor a ship in Chittagong Port is around 9-12 days, whereas the international standard is 2-3 days. Low quality service, delay and uncertainty in loading and unloading of goods,lengthy custom clearance process, frequent strikes, inadequate facilities for container shipment, all this adds to the cost of transaction. As a result, industrial investment thatrequires either export of goods or import of raw materials is heavily discouraged. Withthe growth of foreign trade, Chittagong Port has to operate almost at full capacity.

Recommendations:Port efficiency must be improved. The custom clearance procedure should

be simplified so that it is completed within a few hours. There should be adequate reform

in the labour management system so that the labour market for port services becomesmore competitive. Some of the physical facilities of the port need to be modernised andexpanded. A new port at a different location, preferably a deep-sea port should be set up.

Privatisation and Further Reform

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Recommendations:

The development of an industrial park could be very helpful in creating a congenialenvironment for investment in selected areas even within the context of overall poor investment environment in the country. Availability of ready infrastructure along withsome security support in an industrial park may attract foreign investors for investment in profitable ventures. If BOI is empowered to allocate plots to investors based on their rational needs, then the services needed by investors can be provided. Coexistence of foreign and local investment in the same industrial park may generate spill over benefitsand vibrant competition. Abandoned land and infrastructure at the Adamjee Jute Mill of Narayanganj provides a wonderful scope in this regard as the entire infrastructure alreadyexists there. Closing down of the Gazipur Machine Tools Factory and releasing the landand other facilities can be another easy choice in this regard. Much of the BangladeshSmall and Cottage Industries Corporation (BSCIC) industrial land that has remainedunused so far may be transformed into an industrial park. Other new areas can also beconsidered for establishing industrial parks with modern facilities.

Export-Oriented FDI

Foreign investors actively consider the size of the domestic market whenmaking investment decisions. However, Bangladesh does not have a large domesticmarket for many goods. Hence, we have to encourage FDI in export-oriented industries.Export-oriented FDI is important for another reason. Most foreign investors have a

tendency to send foreign currency abroad in form of profit repatriation and repayment of capital. Foreign exchange earnings through exports are quite helpful to balance off anysuch effects.

Recommendations:

The following steps may be suggested to further attract export-oriented FDI.l New Export Processing Zones (EPZs) may be set up closer to the capital or the port cityso as to minimise transport costs. l Implementation of the ongoing EPZ projects should

be fostered. Non-physical facilities that are provided to EPZs may be extended as muchas possible to export-oriented investment projects located elsewhere in the country.

l Instead of relying just on common products for export such as ready-made garments(RMGs), FDI must be attracted to new export items where Bangladesh has some provencomparative advantage like plastic products, food products, ceramics, etc. The countrymay also explore export of products aimed at the markets in countries of our region. lIdentified export-led investment projects must be promoted among the foreign investorsthrough sectoral profiles.

Importance of the local market

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develop an integrated regional transport network. The government, IGOs and civilsociety should work towards enhancing regional and sub-regional co-operation.

Improving the Image of the Country

One of the most important factors in attracting FDI is the image of thecountry as perceived by potential foreign investors. Unfortunately, Bangladesh suffersdue to a poor image in the international arena. Despite various government actions,overall image of the country has not been very bright because of poor governance,distorted market, half-hearted reforms campaign, inadequate private sector development, poor infrastructure, political instability and natural disasters, etc. Other factors that areresponsible for a poor image of the country are policy inconsistencies, lack of proper treatment to foreign investors and instability of policy etc. For example, Citi Groupinvestment in a private TV channel was not properly treated and the TV channel wasultimately closed.

Bangladesh has earned a fair amount of success as well. For example, povertyhas declined in the recent years. Quite a large amount of private and public investmenthas already been flowing into the infrastructure sector. Further, a number of EPZ’s havealready been constructed and a few others, including one in the private sector, are under construction. Such positive developments are not properly highlighted to potentialinvestors.

Recommendations:

Following points may be recommended to improve the image of thecountry: Positive developments must be promoted abroad among the potential investorsto minimize the negative image; Foreign investors should be treated very cordially. Visarequirement and complexities should be minimized further; l Reforms process must be

speeded up and further de-regulation implemented; l Policies and actions must beconsistent, so that no wrong signal is conveyed to the investors; and policies must becommunicated to investors and concerned domestic regulatory bodies; and A nationalconsensus about the need for FDI and its benefits should be built up.

Pooling Available Funds of NRB

Chinese non-residents in various countries played an important role inchanneling FDI into China. A large number of Bangladeshis live abroad. There is some potential for the non-resident Bangladeshis (NRBs) to invest in their country. Although,theoretically NRBs are treated in the same standard as foreign investors, but in reality it is

not so.

Recommendations:

Investment by NRBs in Bangladesh should be encouraged through proper treatment, particularly for investment in medium scale industries. Additional incentivesand support may be provided by BOI and other concerned ministries. Special financialinstruments may be created to pool the funds from NRBs.

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Conclusion

With fragile balance of payment position and urgent need to boost

industrial production, Bangladesh needs to significantly increase its mobilization

of foreign resources. From the study we may conclude that Bangladesh has a

great prospect of foreign investment in spite of political instability, free falling law

and order situation bureaucratic tangles and corruption, poor and fragile

infrastructure.

Bangladesh stands poised to enter an

era of unprecedented opportunities to achieve sustained

industrial development and technological progress. It is one of

the most open economies among the developing countries.

Like other developing countries, it

actively encourage foreign direct investment in Bangladesh with

a view to creating jobs for our vast labor force, increasing its

foreign exchange earnings, acquiring new and modern

technology and management skills, accelerating the overall

growth and development of the economy and accessing new

market.

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Recommendation

Foreign Direct investments are coveted by developing

countries because these countries do not generate internally enough investible

resources to invest and accelerate their economic growth. Bangladesh, as

developing country, needs ample investment in its economy to spur its growth.

Thus it is the time to address the issue of attracting a much volume of FDI’s by

Bangladesh and to do it promptly and effectively.

ö First of all, there is much information gap about Bangladesh abroad. It

is known by many investors that Bangladesh has developed a world class export oriented apparel industry and it exports high quality

shrimp and frozen foods. But the country has much potential to makeand export a wide range of environmentally friendly products with

rising demand in the world market.

ö The biggest components of production costs, wages to be paid to

labour, are the cheapest by world standard in Bangladesh, which

should help any firm to be very competitive. If such information were

extensively disseminated by Bangladeshi mission then this could have

notable impact in channelling FDI.

ö The local press and corresponding the foreign media operating from

Bangladesh should take the lead in reporting extensively the success

stories of Bangladesh in the economic sphere instead of emphasising only its negative impact.

ö The government should do its best to deepen the process of institutional

and other reforms to enhance the competitive efficiency of the economy,

to improve and upgrade the infrastructural support facilities and to

lower the cost of doing business

ö Take decisive steps toward combating corruption and strengthening

rule of law.

ö Port condition will have to be much improved to up speed handling and

reduce cost.

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ö Reliable and sufficient supply of power is another major requirement of

foreign investment.

Bibliography

1. Mahmudur Rahman; “Enhancing Competitiveness for Promoting Trade,

Investment and Private sector Development in Bangladesh”, Paper

presented on PRS Implementation Forum, 15-17 November 2006.

2. Thomson, Eighth Edition, International Financial Management, by Jeff

Madura.

3. www.bangladesh-bank.org.bd .

4. Bangladesh Bank Publications.

5. Assignment on Globalization

6. Bangladesh Economic Review-2006

7. www. asiatradehub.com

8. www.unctad.org

9. Infrastructure availability Foreign Direct Investment Inflow and their Export orientation: a cross country Exploration by Nagus Kumar

10. Board of Investment

11. Bangladesh Economic Review 2003

12. Statistical pocket book 2003

http://www.bangladesh-bank.org.bd/

http://www.bangladesh-bank.org.bd/

Documents

FDI- Report Body