fdi in bd in comparison among south asian ldcs-thesis

8/4/2019 FDI in BD in Comparison Among South Asian LDCs-Thesis

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Chapter Four: FDI Scenario in Bangladesh

Foreign Direct Investment in Bangladesh in Comparison among South Asian LDCs

Foreign Direct Investment in Bangladesh in

Comparison among South Asian LDCs

Papon Tabassum

Economics Discipline

School of Social Science

Khulna University

Khulna, Bangladesh

October, 2009

Generated by Foxit PDF Creator Foxit Softwarehttp://www.foxitsoftware.com For evaluation only.


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Papon Tabassum

Student No.: 051511

Session: 2007-08

Supervisor

Ms. Nurun Naher Moni

LecturerEconomics Discipline

Khulna University

Khulna, Bangladesh

A thesis submitted to Economics Discipline, School of Social Science,

Khulna University in partial fulfillment for the degree of Bachelor of

Social Science (Hons.) in Economics

October, 2009



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.

Professor Dr. Md. Saiful Islam

Head

Economics Discipline

School of Social Science

Khulna University

October, 2009



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Statement of originality



The findings of this thesis are entirely of the candidates own research and

any part of it has neither been accepted for any degree nor it is being

concurrently submitted for any other degree

.

Papon Tabassum

Student No.: 051511

Session: 2007-08

October, 2009



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Acknowledgement

First of all, I would like to thank the Almighty Allah for the completion of my research

study. Without His kindness, study would not have been possible.

I would like to express my gratitude to my supervisor Ms. Nurun Naher Moni, Lecturer

of Economics Discipline, Khulna University. Her systematic and sincere supervision and

guidance enable me to complete my study successfully.

I would also like to express my thankfulness to my previous supervisor Mr. Sk. Sharafat

Hossen, Lecturer of Economics Discipline, Khulna University. It is indeed a great honor

and privilege for me to study under him. I would also thankful to Mr. Mohammed Ziaul

Haider, Ph.D, Assistant Professor of Economics Discipline, Khulna University, for his

wonderful guidance and assistance.

I would like to express my thankfulness to Mr. Professor Dr. Md. Saiful Islam, Head,

Economics Discipline, Khulna University to give me the opportunity to conduct a thesis

paper.

I am also grateful to my parents for the financial support they provide to complete this

research paper. I would thank to all of my family members, friends and classmates for

their supports and encouragement.

Papon Tabassum

October, 2009



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Abstract

This study paper reveals the present foreign direct investment (FDI) climate and scenario

in Bangladesh and compares this scenario with other South Asian LDCs (Afghanistan,

Bhutan, Maldives and Nepal). For measuring FDI scenario in Bangladesh, FDI inflows,

outflows and component wise inflows are considered. The author also finds out the

relationship between FDI and domestic investment, FDI and BOP, FDI and GNI and

national savings, FDI and employment. The study also considered FDI scenario of other

South Asian LDCs, their priority sectors, investment facilities and international

investment agreements and why these facilities can be considered by Bangladesh

economy. The problems faced by South Asian LDCS are also mentioned in this study.

According to this paper, the trend line of FDI inflows is better than other concerned

countries. Although Maldives has been got the first position in FDI inward stocks as

percentage of GDP and also for World Bank ranking among South Asian LDCs, but

Bangladesh has been got the first position according to the general trend line of FDI

inward stocks. Moreover, Bangladesh has much potentiality to develop this field. The

research paper is based on secondary data which is collected from different websites for

publications, journals, news, reports, working papers, books and other published

materials.

Key Words: FDI, FDI in Bangladesh, South Asian LDCs, FDI in South Asian Countries,

Investment, Savings, BOP, GDP, Employment, Income.



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Table of Contents

Title Page No.

Acknowledgement v

Abstract vi

Table of Contents vii

List of Tables ix

List of figures ix

List of Analysis x

Acronyms and Abbreviations x

Technical Terms Used in the Study xii

Chapter One: Introduction (1-3)

1.1 Background of the Study 1

1.2 Rationale of the Study 2

1.3 Objective of the Study 2

1.4 Scope of the Study 2

1.5 Limitations of the Study 3

Chapter Two: Literature Review (4-6)Chapter Three: Methodology (7-9)

Chapter Four: FDI Scenario in Bangladesh (10-26)

4.1 Favorable FDI Climate 10

4.2 Present FDI Scenario 10

4.2.1 FDI Inflows 11

4.2.1.1 FDI Inflow Distribution by Component 12

4.2.1.2 FDI Distribution by Regulatory Agencies 12

4.2.1.3 Major FDI Sectors 14

4.2.1.4 Major Country-wise FDI Inflows in FY 2008-09 14

4.2.2 FDI Outflows 15

4.2.3 FDI Stock 16



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4.2.4 FDI Facilities/ Incentives 16

4.2.5 Investment Treaties and Bilateral Agreements 17

4.3 Impact on Economic Growth 17

4.3.1 Employment Opportunities 18

4.3.2 Impact on GDP 18

4.3.3 Impact on Domestic Investment 22

4.3.4 Impact on Total Investment 23

4.3.5 Impact on GNI 24

4.3.6 Impact on National savings 26

Chapter Five: FDI Comparison among South Asian LDCs (27-37)

5.1 FDI Climate 27

5.2 Present FDI Scenario 33

5.1.1 Inward FDI Stocks in South Asian LDCs 33

5.1.2 Inward FDI Stock as Percentage of GDP 34

5.1.3 Outward FDI Stock of South Asian LDCs 34

5.3 Priority Sectors for FDI in South Asian LDCS 35

5.4 Factors for Consideration by Investors in Doing Business in South Asian LDCs 35

5.5 Challenges and Constraints 36

Chapter Six: Findings, Bottlenecks and Recommendations (38-44)

6.1 Findings of the Study 38

6.1.1 Findings of the Chapter Four 38

6.1.2 Findings of the Chapter Five 40

6.2 Bottlenecks Found 41

6.3 Recommendations 42

Chapter Seven: Conclusion 45

References (46-59)

Statistical Appendix (60-65)



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List of Tables

Title Page No.

Table-01: Inward FDI Stock of South Asian LDCs,

1980-2007 (In million US$) 60

Table-02: Inward FDI Stock of South Asian LDCs as percentage

of GDP, 1980-2007 61

Table-03: Net FDI Flows and Inflows in Bangladesh 62

Table-04: FDI Inflows Distribution by Components in

Bangladesh, 2001-2007 62

Table-05: FDI Stock in Bangladesh (in Million US$) 63

Table-06: Projects of Foreign Investment and Domestic Investment

in Bangladesh 63

Table-07: Country-wise FDI Inflows in Bangladesh 64

Table-08: FDI outflow of Bangladesh 65

Table-09: Total Investment, Official Investment and Private Investment 65

List of Figures

Title Page No.

Figure-01: Trend Line of Net FDI Flows in Bangladesh, FY 1999-2009 10

Figure-02: Trend Line of FDI Inflows in Bangladesh, FY 2000-2007 11

Figure-03: FDI Inflows Distribution by Components in 2007 12

Figure-04: FDI Distribution by Regulatory Agencies 13

Figure-05: Major Sector-wise FDI Inflows in FY 2007-08 14

Figure-06: Major Country-wise FDI Inflows in FY 2008-09 14

Figure-07: Trend Line of Year-wise FDI Outflows in Bangladesh 15

Figure-08: Inward FDI Stock of Bangladesh 16

Figure-09: Outward FDI Stock in Bangladesh 16

Figure-10: Potential Employment Opportunities in BOI-Registered projects 18

Figure-11: Correlation between Foreign Investment and Local Investment 22

Figure-12: Correlations between FDI, National Income and National Savings 26

Figure-13: Trend Line of Inward FDI Stocks in South Asian LDCs, 1980-2007 33



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Figure-14: Year-wise Inward FDI Stock of South Asian LDCs

As Percentage of GDP, 1980-2007 34

List of Analysis

Title Page No.

Analysis-01: Correlation between Foreign Investment and Domestic Investment 68

Analysis-02: Correlations between FDI and National Savings 68

Analysis-03: Two Stage Least Square Method to Estimate BOP 69

Analysis-04: Multiple Regression Analysis to Estimate Total Investment 71

Analysis-05: Multiple Regression analysis to Estimate GNI 72

Acronyms & Abbreviation

AISA Afghanistan Investment Support Agency

ANOVA Analysis of Variance

BEPZA Bangladesh Export Processing Zone Authority

BIMSTEC Bay of Bengal Initiative for Multi - Sectoral, Technical & Economic

Cooperation

BOI Board of Investment

BOP Balance of Payment

BSCIC Bangladesh Small and Cottage Industries Corporation

CB Commercial Banks

df Degree of Freedom

EB Energy Bangla

EPZ Export Processing Zone

EU European Union

FDI Foreign Direct Investment

FI Financing Institutions

FY Fiscal Year

GDP Gross Domestic Product

GNI Gross National Income

IFC International Finance Corporation



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IMF International Monetary Fund

IT Information Technology

LDC Least Developed Country

MIGA Multilateral Investment Guarantee Agency

MOF Ministry of Finance

MNC Multinational Corporation

MNE Multinational Enterprise

NRG National Reference Group

OECD Organization for Economic Cooperation and Development

OLS Ordinary Least Square

OPIC Overseas Private Investment Corporation

SAARC South Asian Association for Regional Cooperation

SAP Structural Adjustment Programs

se Standard Error

TK Taka

TNC Transnational Corporation

UNCTAD United Nations Conference on Trade and Development

WB World Bank

WIPO World Intellectual Property Organization

Technical Terms Used

Balance of Payment is the total of all international transactions undertaken by a country

during a given time.

Equity capital is the foreign direct investor's purchase of shares of an enterprise in a

country other than its own.

FDI is the investment made by a foreign individual or company in productive capacity of

another country as for example, the purchase or construction of a factory.

GDP Measure of allfinal goods and services produced within the country in 1 year.

IMF is an international organization established in 1944 to provide short term financial

assistance to countries needing to stabilize exchange rates of alleviates balance of

payments difficulties. Since the 80s the IMF has becoming increasingly involved in the



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economic decision-making of nations through the conditionality associated with its

loans.

Infrastructure covers many dimensions, ranging from roads, ports, railways and

telecommunication systems to institutional development (e.g. accounting, legal services,

etc.).

LDCs The worlds poorest countries with very low per capita incomes ($100 or less at

1968 prices), a share of manufacturing in GDP of below 10% and a literacy rate under

20%. At present there are 50 LDCs in the world.

MNE is an enterprise that operates production or marketing facilities in more than one

country.

Portfolio Investment refers to the purchase of foreign stocks, bonds or other securities.

Privatization The transfer to private ownership and control of assets or enterprises which

were previously under public ownership.

Reinvested earnings comprise the direct investor's share (in proportion to direct equity

participation) of earnings not distributed as dividends by affiliates, or earnings not

remitted to the direct investor. Such retained profits by affiliates are reinvested.

South Asian LDCs Afghanistan, Bangladesh, Bhutan, Maldives and Nepal.

TNE is an enterprise that operates production or marketing facilities in more than one

country.

Trade Balance is the net flow dollars into the country due to sales of goods abroad.

UNCTAD an UN organization established in 1964. It is intended to represent the LDCs

and acts as a pressure group for increased aid and an international regime for trade and

investment more favorable to LDCs.

World Bank is the main international agency providing development finance.

Established in 1944, its role was that of post-war reconstruction, primarily in Europe.

Once accomplished, its emphasis shifted to financing development projects in developing

countries. Resources are provided by contributions from its member countries, but its

operations are financed mainly by borrowing from international financial markets. Like

the IMF, the country shareholders have a percentage of votes based on the amount of

resources they provide, the US holding the largest percentage of vote.



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Chapter One: Introduction

1.1 Background of the Study

Foreign Direct Investment (FDI) is a part of total investment in an economy. It has the

potentiality to generate employment, raise productivity, transfer skills and technology,

enhance exports and contribute to the long-term economic development of the worlds

developing countries. More than ever, countries at all levels of development seek to

leverage FDI for development. FDI plays a crucial role to enhance the economy of the

developing country like Bangladesh. Bangladesh is a poor and least developing country.

Its economy is always competing with other developing country. In recent years, the

trend of FDI inflows of Bangladesh is extending at an increasing rate. The inflows of FDI

in Bangladesh are higher than other South Asian LDCs e.g., Afghanistan, Bhutan,

Maldives and Nepal. Among them, the rank of doing business in Maldives is 81 whereas

Bangladesh is 119. It is because the inflows of FDI in Maldives as a percentage of GDP

are higher than other South Asian LDCs. But Bangladesh has most favorable investment

climate among them. FDI helps to meet up deficit trade balance of Bangladesh. Under

Board of Investment (BOI), FDI creates lots of employment opportunities in recent years.

It increases the national income as well as national savings of Bangladesh. Although

recent global recession and unstable political situation hamper the economic growth of

the country in many sectors, the trend of FDI is still increasing. Bangladesh has a now

good position in LDCs. It will be gone out from the LDCs very soon if it will keep this

trend of economic growth. And FDI can support in this regard. Afghanistan has come out

from the surroundings of war recently. It has much potentiality for FDI. So investors are

now showing investing in raw sectors of Afghanistan. FDI climate and investment

facilities of Bhutan are not so much good. The same condition is seen in Nepal. They are

still attracting investors with their tourism sectors. Maldives also attracts investors with

their tourism as well as other potential sectors. But Bangladesh has most potentiality

among these countries. If it keeps this trend of FDI, it can overcome Maldives very soon.



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1.2 Rationale of the Study

Bangladesh is a developing country. It has so much potentiality to develop its economic

growth. But there is not much capital for large scale investment. As a result, large scale

industries are not been possible although there is so much potentiality. In this situation,

FDI can play a great role for establishment of large or medium scale industries. At

present, there are various types of small, medium or large scale foreign industries and

Multinational Corporations (MNCs) in Bangladesh, which contribute a lot for our

economy. Bangladesh has now got the second largest position in the growth rate of FDI

among South Asian LDCs. Besides it has more favorable climate than other South Asian

LDCs. Author has shown this climate through this study. So this is the rationality of

choosing this topic.

1.3 Objective of the Study

To show the current trend and prospects of FDI in Bangladesh and compare with

other South Asian LDCs.

1.4 Scope of the Study

The scope of the study was to cover the inflows of FDI in Bangladesh for various sectors,

such as multinational enterprises and large or medium scale industries which are involved

with FDI, the reasons for increasing or decreasing rate of FDI and comparison the

inflows of FDI in Bangladesh with other South Asian LDCs (Afghanistan, Bhutan,

Maldives and Nepal). This study has obviously been based on secondary data. These

secondary data has been obtained through various published journals, articles, news and

analytical reports, prepared by various renowned government and non-government

organizations through websites, books and other sources.



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1.5 Limitations of the Study

As this study has been based on secondary data, author faced some problems during the

study, which are as follows.

i. FDI related websites of South Asian LDCs like Maldives and Afghanistan are

not so much developed.

ii. Renowned organizations like IMF or UNCTAD, who publish various

economics as well as FDI related working papers on a regular basis, they are

indifferent to concentrate on details studies of South Asian countries.

iii. Lack of knowledge about econometric methods for further analysis.

iv. Insufficient time for conducting a thesis paper.



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Chapter Two: Literature Review

According to Rahman (2003), FDI is the acquisition of managerial control by a citizen or

corporation of a home nation over a corporation of some other host nation. It implies that

the investor exerts a significant degree of influence on the management of the enterprise

resident in the other economy. Such investment involves both the initial transaction

between the two entities and all subsequent transactions between them and among foreign

affiliates, both incorporated and unincorporated. FDI is net inflows of investment to

acquire a lasting management interest (10 percent or more of voting stock) in an

enterprise operating in an economy other than that of the investor.

A typical MNE is one with net sales of 100 million dollars to several thousand milliondollars, having FDI in manufacturing usually accounting for at least 15% to 20% of the

companys total investment. FDI means at least a 25% participation in the share capital of

the foreign enterprise (Lal and Streeten, 1977).

Murtaza (2000) found that FDI has the potential to generate employment, raise

productivity, transfer foreign skills and technology, enhance exports and contribute to the

long-term economic development of the worlds developing countries.

According to the Aggarwal (2008), the criteria underlying the list of LDCs are: a low

income, as measured by GDP per capita; weak human resources, as measured by a

composite index (Augmented Physical Quality of Life Index) based on indicators of life

expectancy at birth, per capita calorie intake, combined primary and secondary school

enrolment, and adult literacy and a low level of economic diversification, as measured by

a composite index (Economic Diversification Index) based on the share of manufacturing

in GDP, the share of the labor force in industry, annual per capita commercial energy

consumption, and UNCTADs merchandise export concentration index.

In Bangladesh, FDI inflows are reported under the capital and financial account of the

countrys Balance of Payments (BOP) statement which provides the direct effect on the



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BOP. Thus the inflow of FDI plays an important role in determining the surplus/deficit in

the capital and financial account of the BOP statement. The initial impact of an inflow of

FDI on Bangladeshs BOP is positive but the medium term effect could become either

positive or negative as the investors increase their imports of intermediate goods and

services, and begin to repatriate profit. Usually, FDI inflow tends to have a greater

positive impact through augmenting exports than creating a negative impact through

increasing imports. It is found that FDI-financed firms tend to export a greater proportion

of their output than their local counterparts. Because these firms usually tend to have a

comparative advantage in their knowledge of international markets, efficiency of

distribution channels, and their ability to adjust and respond to the changing pattern and

dynamics of international markets. Similarly, policies of creating Export Processing

Zones (EPZs) contribute to strengthening the positive correlation between FDI inflows

and exports. So, the inflow of FDI may play an important role in Bangladesh in the long

run in reducing the deficit in the countrys trade balance (Hossain, 2008).

FDI and trade liberalization causes economic growth in the perspective of Bangladesh.

FDI has a dynamic and positive impact on the domestic investment of Bangladesh with

positive and dynamic impact of domestic investment itself. Thus the respective

authorities ought to put efforts in encouraging more FDI inflows to Bangladesh and

review the existing policies in liberalizing trade (Mortaza and Das, 2007).

The Maldives has recorded remarkable economic growth over the past two decades,

especially compared with the rest of the South Asian countries, and is on the threshold of

graduating from LDC status to the middle-income group. Ironically, although the

Maldives lacks the resource endowments, the scale of economies, and the geography

diversity enjoyed by its South Asian neighbors, it has surpassed all of them to achieve the

highest per capita GDP levels in the region. The Maldives belongs to a special category

of countries called "Small Island Economies," of which a large number are dependent

primarily on tourism and or on a narrow product or service range (Hulugalle et al., 2006)



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Nepal has only recently opened the doors to foreign investment. Foreign investment

promotion as an important strategy in achieving the objectives of increasing industrial

production to meet the basic needs of the people, create maximum employment

opportunities and pave the way for the improvement in the balance of payments. Foreign

investment is expected to supplement domestic private investment through foreign capital

flows, transfer of technology, improvement in management skills and productivity and

providing access to international markets (Durbar, 2008).

Bhutan has been little successful in attracting foreign investment that is believed to

generate great benefit to the economy. As FDI is expected not only to bring in much

needed scarce capital but also access to international markets and technical know-how,

Bhutan is fully committed to integrating into the world economy and reaping the benefits

of the integration. One such initiative is its membership to BIMST-EC. Besides, it is also

in the preparation process to accession to World Trade Organization (currently observer

status) and most importantly, the FDI policy had been approved by the national assembly.

Notwithstanding these initiatives on the part of the Royal government, Bhutan is still

considered by foreign investors as less attractive destination partly due to its inaccessible

location and partly due to its small market size and limited resources (Jigme, 2006)

Security and stability is getting better, economic sectors are flourishing day by day in

Afghanistan, and under these circumstances it is expected that Afghanistan will attract

more FDI within the coming years. It should be noted that Afghanistan has a market with

substantial opportunities for businesses such as agricultural consulting services,

manufacturing, precious stones, and semi precious stones and so on. (Shah, 2009)

Concluding Remarks of the Literature Review:

During literature review, author found that FDI in Bangladesh in comparison among

South Asian LDCs is a unique topic. There have not been found any direct similarity with

other articles, journal, working papers, thesis papers or other materials of various

published sources. The compiling the data and information of FDI in Bangladesh and

South Asian LDCs was the thought of researchers own.



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Chapter Three: Methodology

3.1 Formulating a Study Problem

At first, author formulated a study problem for conducting the thesis paper. To think

about the study problem, author considered some major aspects related to this study such

as study design, measurement procedure, sampling strategy, frame of analysis and the

style of writing of the report. Author also considered the availability of time, financial

resources and expertise and knowledge of this field by herself. Moreover, lack of

statistical as well as mathematical knowledge, required for the analysis and lack of

sufficient computer and software were also considered.

3.2 Conceptualizing a Study Design

For conceptualizing the study design and developing the literature aspects, author

reviewed various published books, journals, articles, working papers, thesis papers of

various government and non-government, national and international organizations and

newspapers articles reports and news bulletin through websites and other published

sources. Author always followed the daily newspapers for updated news regarding this

field.

3.3 Constructing an Instrument for Data Collection

Author collected data from the secondary sources such as various papers, articles, books,

journals of government and non-government, national and international organizations

through websites, newspapers and other published sources. This study design is mainly

non-experimental one by nature.

3.4 Selecting a Sample

As this study report is based on secondary data, there is no definite sample or population

size. Here the period of data might be counted as sample size. All the aspects of FDI,

identified by different organizations are sampling elements. Bangladesh as well as other

four countries of South Asian LDCs i.e., Afghanistan, Bhutan, Maldives and Nepal, are

included into the sample frame. Various econometric tools for analyzing the variables are



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sample statistics. Author tried to show the recent FDI trend in Bangladesh as well as

other South Asian LDCs and comparison among them with various variables and

parameters. The study is based on both stratified random sampling and judgmental

sampling.

3.5 Writing a Study Proposal

After completing the previous steps, author submitted a proposal to the supervisor. The

study proposal included the objectives of the study, hypothesis testing, study design,

instruments for data collection, sample size, data processing procedures, problems and

limitations and time frame. The objective of the study was to show the current trend of

FDI in Bangladesh and compare with other South Asian LDCs. The hypothesis testing

was based on multiple regression analysis between the variables by using t-test. Author

also used simultaneous equation model. The data collection method was secondary basis.

The scope of the study was to cover the inflows of FDI in Bangladesh for various sectors,

such as multinational enterprises and large or medium scale industries which are involved

with FDI, the reasons for increasing or decreasing rate of FDI and comparison the

inflows of FDI in Bangladesh with other South Asian LDCs (Afghanistan, Bhutan,

Maldives and Nepal)

3.6 Collecting Data

After finalizing the proposal, author collected data from various published sources. Data

were collected sequentially. At first, author conceptualized about FDI, FDI scenario in

Bangladesh, LDC, name of the LDCs, name of the south Asian LDCs, FDI scenario in

South Asian LDCs, FDI facilities, incentives, agreements, priority sectors, and FDI

climates and so on. Concept of FDI, MNE, and LDC etc. were enriched through various

books. Data about FDI scenario in Bangladesh were collected from the websites and

other published sources of various government and non-government organizations of

Bangladesh such as Ministry of Finance, Board of Investment, and Bangladesh Bureau of

Statistics and so on. The data of South Asian LDCs and other materials were collected

from the websites and other published sources of international organizations such as



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UNCTAD, World Bank, IMF and so on. Moreover, author collected data from the

investment related websites of concerned countries.

3.7 Data Processing

The information of the study is based on both qualitative and quantitative data.

Qualitative data was compiled by computer program such as MS Word. Quantitative data

was analyzed by SPSS software and MS Excel. Various econometric tools such as

correlation analysis, multiple regression analysis, use of two-stage least square, ANOVA

analysis, variables and parameters identified, hypothesis testing, bar diagrams, line

diagrams, pie charts and many other tools were used for analyzing. After analyzing, the

quantitative data was paste into the MS word program.

3.8 Writing Study Report

After processing data, author wrote the study report in an academic style. The study

report was divided into different chapters and sections based upon the main themes of the

study. The first chapter reveals the background, rationality, objectives, scope and

limitations of the study. The second chapter and third chapter show the literature review

and the methodology of the study respectively. The fourth and fifth chapters are the

analysis part. Fourth chapter expresses the FDI scenario in Bangladesh. The fifth chapter

reveals the position of FDI of Bangladesh being a LDC and compare with other South

Asian LDCs. The sixth chapter includes findings of the study, problems and

recommendations. The seventh chapter is the concluding remarks. References and

statistical annexes are attached into the ending of the study report. Abstract and

acknowledgement are attached after the cover pages in beginning. Acronyms,

abbreviation and technical terms are attached after the contents of the study.



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4.1 Favorable FDI Climate

Bangladesh is considered as an attractive destination in South Asia for doing businesses. Therecently published Doing Business 2010 report by the World Bank and IFC has ranked

Bangladesh 119th among 183 economies of the world. However, the rank of Bangladesh

in investor protection is 20, which is even better than many developed economies.

Besides, Bangladeshs position in starting a business, getting credit and paying taxes are

98, 71 and 89 respectively.

4.2 Present FDI Scenario

Global Economic recession has already affected Bangladesh Economy. But the recession

has not adversely affected Bangladesh Economy like other South Asian countries.

Recession has badly affected developed countries which have decreased their

consumption expenditures. As a result, those countries which has trade relation with

Bangladesh, has the negative impact on FDI in Bangladesh. But still FDI's contribution to

the total investment in Bangladesh economy is remarkable. The FDI flow of Bangladesh

was 6.1% as a percentage of GDP in 2007. The figure-01 presents the trend line of net

FDI flows in Bangladesh.

Figure-01: Trend Line of Net FDI Flows in Bangladesh, FY 1999-2009

882769793675776385376391383 5500

200

400

600

800

1000

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09FDIFlows(inMillionUS$)

FDI Flows 2 per. Mov. Avg. (FDI Flows)

Source: Authors Compilation, Based on Bangladesh Economic Review 2009



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The figure-01 shows the net FDI flows in Bangladesh from FY 1999-2009. The trend line

(2 period moving averages) shows the cyclical fluctuation of FDI flows. In FY 2000-01,

The FDI rate was higher than the previous year. During 2001-2004, the FDI flows

remained at same rate. But after 2004, the flows were increasing at increasing rate.

Although in FY 2005-06, the flow decreased a little but after that period it again

recovered. Bangladesh achieved highest FDI in FY 2008-09. That means Bangladesh has

still been enabled to attract the investors in spite of recent global economic recession and

recent political movement of Bangladesh. The statistical data of net FDI of Bangladesh is

attached into the appendix.

4.2.1 FDI Inflows

The inflows of FDI are now playing a fundamental role in economic growth of

Bangladesh.

Figure-02: Trend Line of FDI Inflows in Bangladesh, FY 2000-2007

579 355 328 350 460 845 793 6660

200

400

600

800

1000

2000 2001 2002 2003 2004 2005 2006 2007FDIInflows(inMillionUS$)

FDI Inflows 2 per. Mov. Avg. (FDI Inflows)


The figure-02 presents the year-wise FDI inflows in Bangladesh. The trend line shows

the cyclical fluctuations of FDI inflows in different years. In 2000, the FDI inflow was

US$579. But after that period, FDI inflows had been decreased. From 2004, FDI inflow

was increasing and Bangladesh got highest FDI in 2005. In 2007, this flow was again

decreasing because of political instability of Bangladesh. The statistical data of net FDI

of Bangladesh is attached into the appendix.



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4.2.1.1 FDI Inflow Distribution by Component

Figure-03: FDI Inflows Distribution by Components in 2007

66%

16%

18%

Equity Capital

Reinvested Earnings

Intra-Company

Loans


The pie-chart shows the FDI inflows distribution by components in 2007. Equity capital,

the principal component is 60%, reinvestment earnings are 32% and intra-company loans

8%. The FDI inflows distribution by components of year 2001-2007 is attached into the

appendix.

4.2.1.2 FDI Distribution by Regulatory AgenciesForeign Investors would take permission for doing business in Bangladesh and registerfrom the following regulatory agencies.

Sl. No. Regulatory Agencies Regulation Power

01 Board of Investment (BOI) Registration of all industrial projects in

the private sector outside the authorities

of BSCIC and BEPZA. For institutional

facility purposes, registration of

industrial projects financed by

Commercial Banks or by different

financing institutions outside the

authorities of BSCIC & BEPZA.



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02 Bangladesh Export Processing

Zones Authority (BEPZA)

Approval of all projects to be located in

the EPZs.

03 Bangladesh Small and Cottage

Industries Corporation (BSCIC)

Registration of industrial projects

having capital investment not

exceeding TK 30.00 million (for

BMRE maximum TK 45.00 million).

04 Financing Institutions (FI) and

Commercial Banks (CB)

Approval and financing of projects

having investment of any amount.

Figure-04: FDI Distribution by Regulatory Agencies

87%

13%

EPZ Registered

Non-EPZ Registered


The pie-chart presents that most of the FDI (87%) have been brought by companies

outside EPZs. The balance (13%) has been invested in companies registered with

BEPZA. The FDI inflows distribution by regulatory agencies is attached into the

appendix



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4.2.1.3 Major FDI Sectors

Figure-05: Major Sector-wise FDI Inflows in FY 2007-08

0.06%

0.31%0.05%5.69%

9.22%

12.35%

28.21%

44.11%

Textiles Services

Engineering Chemical

Agrobased Food and Allied

Leather and Leather Goods Miscellaneous


In FY 2007-08, foreign investment was dominated by textiles, services and. Engineering.

Besides, chemical industries, agro based industries, food and allied, leather and leather

goods was also playing a good role.

4.2.1.4 Major Country-wise FDI Inflows in FY 2008-09

Figure-06: Major Country-wise FDI Inflows in FY 2008-09

15952.685

5596.6

4259.682

3294.694

2736.708

1824.449

1701.015

1599.056

1390.084

1108.16

0 5000 10000 15000 20000

UK

Russia

Canada

UAE

US

South Korea

India

China

Germany

Indonesia

FDI Inflows (in Million TK)

FDI Inflows




27/82



In 2006, FDI has been originated from 27 countries dominated by both developed

economies and developing economies. The top-10 FDI sources are UK, Russia, Canada,

UAE, US, South Korea, India, China, Germany and Indonesia respectively. The figure-05

presents country-wise FDI inflows in FY 2008-09. The statistical data of 27 FDI inflows

of countries is attached into the appendix.

4.2.2 FDI Outflows

Figure-07: Trend Line of Year-wise FDI Outflows in Bangladesh

2

20.6

4.1

4

21

9

0.1

0.5

-0.3

-5 0 5 10 15 20 25

1985

1990

1999

2000

2001

2002

2006

2007

2008

FDI Outflow (in million US$)

FDI Outflow

Source: Authors Compilation, Based on World Investment Report of UNCTAD

Bangladesh economy is now also keeping a part of outward FDI. The figure-06 expresses

the FDI outflow of Bangladesh. In 1985, FDI outflow was negative. But after 1990, FDI

outflows is increasing and showing a positive trend. In 2001, Bangladesh got second

highest FDI outflow. But after that period, this rate was again decreasing. Bangladesh got

highest FDI outflow in 2007. The Year-wise data of FDI outflows of Bangladesh is




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4.3 Favorable FDI Climate

Bangladesh is considered as an attractive destination in South Asia for doing businesses. Therecently published Doing Business 2010 report by the World Bank and IFC has ranked

Bangladesh 119th among 183 economies of the world. However, the rank of Bangladesh

in investor protection is 20, which is even better than many developed economies.

Besides, Bangladeshs position in starting a business, getting credit and paying taxes are

98, 71 and 89 respectively.


Global Economic recession has already affected Bangladesh Economy. But the recession

has not adversely affected Bangladesh Economy like other South Asian countries.

Recession has badly affected developed countries which have decreased their

consumption expenditures. As a result, those countries which has trade relation with

Bangladesh, has the negative impact on FDI in Bangladesh. But still FDI's contribution to

the total investment in Bangladesh economy is remarkable. The FDI flow of Bangladesh

was 6.1% as a percentage of GDP in 2007. The figure-01 presents the trend line of net

FDI flows in Bangladesh.

Figure-01: Trend Line of Net FDI Flows in Bangladesh, FY 1999-2009

882769793675776385376391383 5500

200

400

600

800

1000

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09FDIFlows(inMillionUS$)

FDI Flows 2 per. Mov. Avg. (FDI Flows)




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The figure-01 shows the net FDI flows in Bangladesh from FY 1999-2009. The trend line

(2 period moving averages) shows the cyclical fluctuation of FDI flows. In FY 2000-01,

The FDI rate was higher than the previous year. During 2001-2004, the FDI flows

remained at same rate. But after 2004, the flows were increasing at increasing rate.

Although in FY 2005-06, the flow decreased a little but after that period it again

recovered. Bangladesh achieved highest FDI in FY 2008-09. That means Bangladesh has

still been enabled to attract the investors in spite of recent global economic recession and

recent political movement of Bangladesh. The statistical data of net FDI of Bangladesh is


4.4.1 FDI Inflows

The inflows of FDI are now playing a fundamental role in economic growth of

Bangladesh.

Figure-02: Trend Line of FDI Inflows in Bangladesh, FY 2000-2007

579 355 328 350 460 845 793 6660

200

400

600

800

1000

2000 2001 2002 2003 2004 2005 2006 2007FDIInflows(inMillionUS$)

FDI Inflows 2 per. Mov. Avg. (FDI Inflows)


The figure-02 presents the year-wise FDI inflows in Bangladesh. The trend line shows

the cyclical fluctuations of FDI inflows in different years. In 2000, the FDI inflow was

US$579. But after that period, FDI inflows had been decreased. From 2004, FDI inflow

was increasing and Bangladesh got highest FDI in 2005. In 2007, this flow was again

decreasing because of political instability of Bangladesh. The statistical data of net FDI

of Bangladesh is attached into the appendix.



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4.4.1.1 FDI Inflow Distribution by Component

Figure-03: FDI Inflows Distribution by Components in 2007

66%

16%

18%

Equity Capital

Reinvested Earnings

Intra-Company

Loans


The pie-chart shows the FDI inflows distribution by components in 2007. Equity capital,

the principal component is 60%, reinvestment earnings are 32% and intra-company loans

8%. The FDI inflows distribution by components of year 2001-2007 is attached into the

appendix.

4.4.1.2 FDI Distribution by Regulatory AgenciesForeign Investors would take permission for doing business in Bangladesh and register

from the following regulatory agencies.

Sl. No. Regulatory Agencies Regulation Power

01 Board of Investment (BOI) Registration of all industrial projects in

the private sector outside the authorities

of BSCIC and BEPZA. For institutional

facility purposes, registration of

industrial projects financed by

Commercial Banks or by different

financing institutions outside the

authorities of BSCIC & BEPZA.



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02 Bangladesh Export Processing

Zones Authority (BEPZA)

Approval of all projects to be located in

the EPZs.

03 Bangladesh Small and Cottage

Industries Corporation (BSCIC)

Registration of industrial projects

having capital investment not

exceeding TK 30.00 million (for

BMRE maximum TK 45.00 million).

04 Financing Institutions (FI) and

Commercial Banks (CB)

Approval and financing of projects

having investment of any amount.

Figure-04: FDI Distribution by Regulatory Agencies

87%

13%

EPZ Registered

Non-EPZ Registered


The pie-chart presents that most of the FDI (87%) have been brought by companies

outside EPZs. The balance (13%) has been invested in companies registered with

BEPZA. The FDI inflows distribution by regulatory agencies is attached into the

appendix.



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4.4.1.3 Major FDI Sectors

Figure-05: Major Sector-wise FDI Inflows in FY 2007-08

0.06%

0.31%0.05%5.69%

9.22%

12.35%

28.21%

44.11%

Textiles Services

Engineering Chemical

Agrobased Food and Allied

Leather and Leather Goods Miscellaneous


In FY 2007-08, foreign investment was dominated by textiles, services and. Engineering.

Besides, chemical industries, agro based industries, food and allied, leather and leather

goods was also playing a good role.

4.2.1.4 Major Country-wise FDI Inflows in FY 2008-09

Figure-06: Major Country-wise FDI Inflows in FY 2008-09

15952.685

5596.6

4259.682

3294.694

2736.708

1824.449

1701.015

1599.056

1390.084

1108.16

0 5000 10000 15000 20000

UK

Russia

Canada

UAE

US

South Korea

India

China

Germany

Indonesia

FDI Inflows (in Million TK)

FDI Inflows




33/82


In 2006, FDI has been originated from 27 countries dominated by both developed

economies and developing economies. The top-10 FDI sources are UK, Russia, Canada,

UAE, US, South Korea, India, China, Germany and Indonesia respectively. The figure-05

presents country-wise FDI inflows in FY 2008-09. The statistical data of 27 FDI inflows

of countries is attached into the appendix.

4.4.2 FDI Outflows

Figure-07: Trend Line of Year-wise FDI Outflows in Bangladesh

2

20.6

4.1

4

21

9

0.1

0.5

-0.3

-5 0 5 10 15 20 25

1985

1990

1999

2000

2001

2002

2006

2007

2008

FDI Outflow (in million US$)

FDI Outflow

Source: Authors Compilation, Based on World Investment Report of UNCTAD

Bangladesh economy is now also keeping a part of outward FDI. The figure-06 expresses

the FDI outflow of Bangladesh. In 1985, FDI outflow was negative. But after 1990, FDI

outflows is increasing and showing a positive trend. In 2001, Bangladesh got second

highest FDI outflow. But after that period, this rate was again decreasing. Bangladesh got

highest FDI outflow in 2007. The Year-wise data of FDI outflows of Bangladesh is




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4.4.3 FDI Stock

Figure-08: Inward FDI Stock Figure-09: Outward FDI Stock

478

2162

4817

0

1000

2000

3000

4000

5000

6000

1990 2000 2008Inw

ardFDIStock(inMillionUS$) Inward Stock

45

69

81

0

20

40

60

80

100

1990 2000 2008OutwardStock(inMillionUS$) Outward Stock

Source: Authors Compilation, Based on Source: Authors Compilation, Based on

World Investment Report of UNCTAD World Investment Report of UNCTAD

The figure-07 shows the increasing rate of Inward FDI stock in Bangladesh. In 1990,

Bangladesh had US$478 inward FDI stock. Now this rate is US$4817. Bangladesh also

plays a role in outward FDI stock. The figure-08 presents the outward FDI stock. In 2008,

outward FDI stock of Bangladesh was US$81.

4.4.4 FDI Facilities/ Incentives

Major incentives are as follows:

1. Tax Exemptions: Generally 5 to 7 years. However, for power generation exemption

is allowed for 15 years.

2. Duty : No import duty for export oriented industry. For other industry it is

@ 5% advalorem.

3. Tax Law : i. Double taxation can be avoided in case of foreign investors on

the basis of bilateral agreements.

ii. Exemption of income tax up to 3 years for the expatriate

employees in industries specified in the relevant schedule of



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Income Tax ordinance.

4. Remittance : Facilities for full repatriation of invested capital profit and divided.

5. Exit : An investor can wind up on investment either through a decision of

the AGM or EGM. Once a foreign investor completes the

formalities to exit the country, he or she can repatriate the sales

proceeds after securing proper authorization from the Central

Bank.

6. Ownership : Foreign investor can set up ventures either wholly owned on in

joint collaboration with local partner.

4.4.5 Investment Treaties and Bilateral Agreements

Investment treaties for promotion and protection of investment between Bangladesh and

the following countries have been concluded: USA, Republic of Korea, UK, Thailand,

Germany, Turkey, Romania, France, Belgium, and Italy. Negotiations are going on with a

few other East Asian and European countries including the Netherlands and Switzerland.

Avoidance of Double Taxation - Bilateral Agreements

Bilateral agreements have been concluded by the Bangladesh government with

the following countries for avoidance of double taxation: Japan, Italy, Singapore,

Sweden, Republic of Korea, United Kingdom (including Northern Ireland),

Canada, Malaysia, Romania, Sri Lanka, France, Germany, India and Pakistan.

Negotiations are going on for similar agreements with Belgium, the Netherlands

and the USA.

4.5 Impact on Economic Growth

Although there is no direct relationship between FDI and economic growth, the recent

years survey reveals that FDI and economic growth is positively correlated. FDI is a part

of total investment in an economy. In modern economy, investment plays a great role in

economic growth of a country. It increases national revenue, national income and

national savings. It creates employment opportunities. It also influences the BOP.



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4.5.1 Employment Opportunities

Creating opportunities for employment is a key area of focus of the national economic

development and poverty reduction strategy. Generally, manufacturing investments

provide large employment opportunities for managerial, technical, supervisory, skilled,

semi-skilled and unskilled persons.

Figure-10: Potential Employment Opportunities in BOI-Registered projects

Employment Opportunities

346,587

373,625

273,754

319,516

410,744

208,635

458,478

418,529

425,232

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009


Projects registered with BOI during FY 2008-09 have estimated to provide 208635 job

opportunities which are shown in the figure-09.

4.5.2 Impact on BOP

In Bangladesh, FDI inflow creates direct effect on the BOP. Thus the inflow of FDI plays

an important role in determining the surplus/deficit in the capital and financial account of

the BOP statement. The initial impact of an inflow of FDI on Bangladeshs BOP is positive but the medium term effect could become either positive or negative. After

setting up capital machineries, the FDI-financed companies begin to export their

products. Most of these companies are export-oriented. Usually, FDI inflow tends to have

a greater positive impact through augmenting exports than creating a negative impact

through increasing imports. Policies of creating Export Processing Zones (EPZs)



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contribute to strengthening the positive correlation between FDI inflows and exports. So,

the inflow of FDI may play an important role in Bangladesh in the long run in reducing

the deficit in the countrys trade balance. Empirical research in several countries suggests

that the initial inflow of FDI tends to increase the host country's imports. One reason for

this is that primarily FDI companies have high propensities to import capital and

intermediate goods and services that are not readily available in the host country.

However, if FDI is concentrated in import substituting industries, then it is expected to

affect imports negatively because the goods that were imported earlier would now be

produced in the host country by foreign investors. We can prove that FDI influences the

BOP. Consider the following simultaneous equation model to estimate the two-stage least

square method:

BOP Function: tttttt uErFiCaCuB 154321 (i)

Financial Account Function: ttttt uOtPoFdFi 24321 .. (ii)

Where,

B = Balance of payment

Cu = Current Account

Ca = Capital Account

Fi = Financial Account

Er = Errors and Omission

Fd = FDI

Po = Portfolio Investment

Ot = Other Investment

The u1, u2 are residuals, 54321 ,,,, , 4321 ,,, are parameters,B, Fi, endogenousvariables and Cu, Ca, Er, Fd, Po, Ot are exogenous variables. The BOP equation states

that BOP is determined by current account, capital account, financial account and errors

and omission. The financial account function postulates that the financial account

determined on the basis of FDI, portfolio investment and other investment. So there is

obviously a simultaneous equation problem.



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(a) Order Condition for identification: 1 GMK .

In our example, K = 8 M = 5 G = 2

)12()58(

3 >1

The order condition is satisfied and the equation is overidentified.

(b) Rank Condition for Identification:

Complete Table of Structural Parameters Table of parameters

Variables

B Cu Ca Fi Er Fd Po Ot

1st Equation

2nd Equation

-1 2 3 4 5 0 0 0

0 0 0 -1 0 2 3 4

The rank condition for identification is also satisfied for the BOP function and the BOP

function is overidentified.

We first obtain the reduced-form value of the endogenous variable (Financial Account):

ttttttttuOtPoFdErCaCuFi 27654321 . (iii)

The results are as follows

OtPoFdErCaCuiF 00.100.100.144.343.366.127.2 (iv)

We next substitute the calculated value of financial account for the original Fi variable,

and perform the regression

*

1

*

5

*

4

*

3

*

2

*

1

*

tttttt uErFiCaCuB .. (v)

The result is as follows

ttttt ErFiCaCuB 986.002.1089.1998.0499.50 (vi)

se = (45.537) (.033) (.102) (.063) (.101)

t = (-1.109) (30.104) (10.668) (16.239) (9.739)

R2 = 0.996 df= 9

2 3 4



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The coefficient of determination,R2 is 0.996 or 99% that means the regression line gives

99% fit for the observed data. We can create a hypothesis that is financial account

(including FDI flows) influences balance of payment of Bangladesh.

The null hypothesis is

H0 : 4 = 0

The alternative hypothesis is

H1 : 4 0

The standard error of parameter 4 is 0.063 which is smaller than half of the numerical

value (1.02/2) of the parameter estimate. That means we reject null hypothesis that the

true population parameter 4 =0. We conclude that the least square estimate is

statistically significant and the rejection of null hypothesis 4 = 0 implies that financial

account (including FDI) influences overall BOP. We can take t-test for further testing.

The observed t value is 16.239 with the desired level of significance is 5% in a two-tailed

test where df is 9. The observed value is greater than the critical value 2.262. That means

we reject the null hypothesis and the estimate 4 is statistically significant.



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4.5.3 Impact on Domestic Investment

FDI may displace domestic investment by competing in product and financial market due

to its superiority in technologies and skills, larger economies of scale and better

management and production process. There are a number of empirical evidences that

support the view that domestically owned firms are positively related to the presence of

foreign firms.

Figure-11: Correlation between Foreign Investment and Local Investment

Local Investment

3000020000100000-10000

Foreign

Investment

30000

20000

10000

0

-10000

Source: Authors Compiling, Based on Bangladesh Economic Review 2009

The figure-10 shows that there is a positive correlation between local investment and

foreign investment during the period 1992-2009. It is seen that when local investment

increases then the foreign investment increases but a lower rate because there are some

factors behind this situation. So there is a low degree of positive correlation between

domestic investment and foreign investment. The data of Local investment and domestic

investment of period 1992-2009 and correlation analysis are attached into the appendix.

Due to the expected backward and forward linkages between FDI and local industries,

FDI can either crowd in domestic investment by transferring technologies and knowledgeto domestic firms or crowd out domestic investment due to larger economies of scale and

better managerial skills. These characteristics of FDI open the door for the discussion of

the dynamic effect of FDI on domestic investment. FDI also plays a role for substitutes or

complementary of domestic investment to balance the total investment.



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4.5.4 Impact on Total Investment

Total investment of an economy equals official investment and private investment i.e.,

domestic investment and foreign investment. The growth of investment will be positive

within a favorable investment climate.

Let us consider the following model for estimating that the FDI flows of Bangladesh

influence the total investment.

Investment Function: ttttt uOtFdOfI 4321 ...(i)

Where,

I = Investment Function

Of = Official Investment

Fd = FDI


t = Time

The u is residual, 4321 ,,, are parameters, Iendogenous variable and Of, Fd, Otare

exogenous variables. The investment function states that total investment is determined

by official/ public investment and private investment which includes FDI and other

private investment. We first compute the value of variables. The statistical analysis is


The results are as follows:

OtFdOfI 000.1995.0000.1114.0 (ii)

se = (0.329) (0.003) (0.026) (0.000)

t = (0.346) (345.732) (38.117) (2915.668)

R2

= 1.00 df= 9

The coefficient of determination,R2 is 1.00 or 100% that means the regression line gives

100% fit for the observed data. We can create a hypothesis that is FDI influences the

total investment.



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H0 : 3 = 0


H1 : 3 0

The standard error of parameter 3 is 0.026 which is smaller than half of the numerical

value (0.995/2) of the parameter estimate. That means we reject null hypothesis that the

true population parameter 3 =0. We conclude that the least square estimate is

statistically significant and the rejection of null hypothesis 3 = 0 implies that FDI

influence the total investment. We can take t-test for further testing. The observed t value

is 38.117 with the desired level of significance is 5% in a two-tailed test where df is 9.

The observed value is greater than the critical value 2.262. That means we reject the null

hypothesis and the estimate 3 is statistically significant.

4.5.5 Impact on GNI

According to the classical macroeconomics, gross national income is determined by

consumption, investment, government expenditure, export and import in a four sector

economy. That means FDI, which is a part of total investment, plays a role in gross

national income.

Let us consider the following multiple regression model for estimating that the

investment (including FDI flows) of Bangladesh influence GNI.

GNI Function: ttttt uOtXnGICY 654321 ... (i)

Where,

Y = GNI

C = Consumption

I = Investment

G = Government Expenditure

Xn = Trade Balance; Export (X)-Import (M)


t = Time



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The u is residual, 654321 ,,,,, are parameters, Yendogenous variable and C, I, G,

Xn, Otare exogenous variables. We first compute the value of variables. The statistical

data and analysis are attached into the appendix.

The results are as follows:

OtXnGICYtttt

064.1875.0049.1437.1068.0012.299 (ii)

t = (34.703) (21635.298) (13.345) (18.872) (20.788) (378.989)

R2

= 1.00 df = 7

The coefficient of determination, R2is 1.00 or 100% that means the regression line gives

100% fit for the observed data. We can create a hypothesis that is investment in

Bangladesh (including FDI) influences the GNI.


H0 : 3 = 0


H1 : 3 0

The observed t value is 13.345 with the desired level of significance is 5% in a two-tailed

test where df is 7. The observed value is greater than the critical value 2.365. That means

we reject the null hypothesis that the true population parameter 3 =0. We conclude that

the least square estimate is statistically significant and the rejection of null hypothesis

3 = 0 implies that investment (including FDI) influences the GNI of Bangladesh.



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4.5.6 Impact on National Savings

FDI plays a role in increasing consumption as well as savings of the economy.

Figure-12: Correlations between FDI, National Income and National Savings

Local Investment

3000020000100000-10000

F

oreignInvestment

30000

20000

10000

0

-10000


Figure-11 shows that there is a positive correlation between national savings and FDI

during the period 2001-2008. It is seen that when FDI increases then national savings

increases at a higher rate. So there is a high degree of positive correlation between

national savings and FDI. The data of FDI and national savings of period 2001-2008 is




45/82


Chapter Five: FDI Comparison among South Asian LDCs

5.2 FDI Climate

South Asian LDCs are considered as attractive destination for doing businesses. The recentlypublished Doing Business 2010 report by the World Bank and IFC has ranked the South

Asian LDCs as follows.

Aspects Afghanistan Bangladesh Bhutan Maldives Nepal

Easy of Doing Business 160 119 126 87 123

Starting a Business 23 98 80 49 87

Dealing with Construction Permit 149 118 127 9 131

Employing Workers 69 124 12 41 148

Registering Property 164 176 41 183 26

Getting Credit 127 71 177 150 113

Protecting Investors 183 20 132 73 73

Paying Taxes 55 89 90 1 124

Trading Across Borders 183 107 153 126 161

Enforcing Contracts 164 180 33 92 122

Closing A Business 183 108 183 126 105

Starting a Business

The challenges of launching a business in South Asian LDCs are shown below. It

included the number of steps entrepreneurs can expect to go through to launch, the time it

takes on average, and the cost and minimum capital required as a percentage of gross

national income (GNI) per capita.

Indicator Afghanistan Bangladesh Bhutan Maldives Nepal

Procedures (Numbers) 4 7 8 5 7

Time (Days) 7 44 46 9 31

Cost (% of income per capita) 30.2% 36.2% 8% 10% 53.6%

Minimum capital (% of income

per capita)

0 0 0 4% 0



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It is seen that there are only 4 procedures to go through to launch a business in Afghanistan;

entrepreneurs of Bangladesh go through 7 steps. Unnecessary steps should be removed from

Bangladesh. Afghanistan takes 7 days to start a business whereas Bangladesh takes 44 days

which is very lengthy and boring for entrepreneurs. No minimum capital is required for starting a

business in Bangladesh which is a positive sign for businessman.

Dealing with Construction Permit

Shown below are the procedures, time, and costs to build a warehouse, including

obtaining necessary licenses and permits, completing required notifications and

inspections, and obtaining utility connections.


Procedures (number) 13 14 25 9 15

Time (days) 340 231 183 118 424

Cost (% of income per capita) 12877.6 645.1 149.0 21.9 221.3

In Maldives, there are only 9 procedures to build a warehouse whereas Bangladesh has

14 procedures to obtain necessary licenses and permits, complete required notifications

and inspections and obtain utility connections. Bangladesh needs 231 days to build a

warehouse whereas Maldives takes 118 days.

Employing Workers

The difficulties that employers face in hiring and firing workers are shown below. Each

index assigns values between 0 and 100, with higher values representing more rigid

regulations. The Rigidity of Employment Index is an average of the three indices.


Difficulty of hiring

index (0-100)

0 44 0 33 67

Rigidity of hours index (0-100) 20 0 0 20 0

Difficulty of redundancy

index (0-100)

40 40 20 0 70



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Rigidity of employment

index (0-100)

20 28 7 18 46

Redundancy costs (weeks

of salary)

30 104 10 9 90

In Afghanistan, there are no rigid regulations whereas Bangladesh has 44 rigid

regulations for employing workers. Redundancy cost in Maldives is 9 weeks of salary.

On the contrary, Bangladesh is 104 weeks of salary which is very high for being a LDC.

Registering Property

The ease with which businesses can secure rights to property is shown below. Included

are the number of steps, time, and cost involved in registering property.


Procedures (number) 9 8 5 No Practice 3

Time (days) 250 245 64 No Practice 5

Cost (% of property value) 4.0 10.2 0 No Practice 4.8

Bangladesh takes 245 days to follow the 8 procedures of registering properties which cost

is 10.2% of property value. On the other hand, there are not seen such practices in

Maldives. But registering property is a legal step for making your property legal or

authorized. But Bangladesh needs to reduce the time and number of procedures.

Getting Credit

Measures on credit information sharing and the legal rights of borrowers and lenders are

shown below. The Legal Rights Index ranges from 0-10, with higher scores indicating

that those laws are better designed to expand access to credit. The Credit InformationIndex measures the scope, access and quality of credit information available through

public registries or private bureaus. It ranges from 0-6, with higher values indicating that

more credit information is available from a public registry or private bureau.



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Strength of legal rights index

(0-10)

6 7 2 4 5

Depth of credit information

index (0-6)

0 2 0 0 2

Public registry coverage (% of

adults)

0 .9 0 0 0

Private bureau coverage (% of

adults)

0 0 0 0 0.3

Protecting Investors

The indicators below describe three dimensions of investor protection: transparency of

transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director

Liability Index), shareholders ability to sue officers and directors for misconduct (Ease

of Shareholder Suits Index) and Strength of Investor Protection Index. The indexes vary

between 0 and 10, with higher values indicating greater disclosure, greater liability of

directors, greater powers of shareholders to challenge the transaction, and better investor

protection.


Extent of disclosure index (0-10) 0 6 5 0 6

Extent of director liability index

(0-10)

0 7 3 8 1

Ease of shareholder suits index

(0-10)

2 7 4 8 9

Strength of investor protection

index (0-10)

0.7 6.7 4 5.3 5.3

In the case of protecting investors, Bangladesh is the greater disclosure than Maldives.

The position in liability of directors and powers of shareholders in Bangladesh, Maldives

and Nepal is very good. Bangladesh is the better investor protection than other South

Asian LDCs.

Paying Taxes



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The data below shows the tax that a medium-size company must pay or withhold in a

given year, as well as measures of the administrative burden in paying taxes. These

measures include the number of payments an entrepreneur must make; the number of

hours spent preparing, filing, and paying; and the percentage of their profits they must

pay in taxes.


Payments (number per year) 8 21 18 1 34

Time (hours per year) 275 302 274 0 338

Profit tax (%) 0 25.7 35 0 16.8

Labor tax and contributions (%) 0 0 1.1 0 11.3

Other taxes (%) 36.4 9.2 4.4 9.1 10.7

Total tax rate (% profit) 36.4 35 40.6 9.1 38.8

In Maldives and Afghanistan, an entrepreneur takes 1 and 8 numbers of paying taxes

whereas Bangladesh takes 21 numbers. There is no hours spent for preparing tax,

Bangladesh takes 302 hours per year. Total tax rate as percentage of profit in Bangladesh

is 35% whereas Maldives is only 9.1%.

Trading Across Borders

The costs and procedures involved in importing and exporting a standardized shipment of

goods are detailed under this topic. Every official procedure involved is recorded -

starting from the final contractual agreement between the two parties, and ending with the

delivery of the goods.


Documents to export (number) 12 6 8 8 9

Time to export (days) 74 25 38 21 41

Cost to export (US$ per container) 3350 970 1210 1348 1764

Documents to import (number) 11 8 11 9 10

Time to import (days) 77 29 38 20 35

Cost to import (US$ per container) 3000 1375 2140 1348 1825



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Bangladesh has to submit only 6 documents for export and takes 25 days for exporting

whereas Afghanistan takes 74 days. The export cost and import cost of Bangladesh is

lowest than other South Asian LDCs. Bangladesh takes 29 days for importing whereas

Afghanistan takes 77 days.

Enforcing Contracts

The ease or difficulty of enforcing commercial contracts is measured below. This is

determined by following the evolution of a payment dispute and tracking the time, cost,

and number of procedures involved from the moment a plaintiff files the lawsuit until

actual payment.


Procedures (number) 47 41 47 41 39

Time (days) 1642 1442 225 665 735

Cost (% of claim) 25.0 63.3 0.1 16.5 26.8

To enforce a contract, Bangladesh takes 1442 days whereas Bhutan takes only 225 days.

Cost of enforcing contracts as percentage of claim is highest than other South Asian

LDCs.

Closing A Business

The time and cost required to resolve bankruptcies is shown below. The data identifies

weaknesses in existing bankruptcy law and the main procedural and administrative

bottlenecks in the bankruptcy process. The recovery rate, expressed in terms of how

many cents on the dollar claimants recover from the insolvent firm, is also shown.


Time (years) No Practice 4 No Practice 6.7 5.0Cost (% of estate) No Practice 8 No Practice 4 9

Recovery rate (cents) 0 23.2 0 18.2 24.5




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The investment climate of South Asian LDCs is more favorable for doing business. As a

result, the foreign investors of developed countries are showing lots of interest to invest

here.

5.3.1 Inward FDI Stocks in South Asian LDCs

Figure-13: Trend Line of Inward FDI Stocks in South Asian LDCs, 1980-2007

0

200

400

600

800

1000

1200

1400

1600

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

InwardFDIStock(inMillionUS$)

0

1000

2000

3000

4000

5000

6000

7000

Afganistan Bhutan Maldives Nepal Bangladesh

Source: Authors Compilation, based on World Investment Report of UNCTAD

Figure-12 shows that only Bangladesh keeps a great role for earnings from inward FDI

stocks. The line curve of Bangladesh reveals an increasing rate of inward FDI stock from

the year 1996. Afghanistan is getting FDI from 2002 and now its FDI is upward slopping

at an increasing rate. The line curve of Maldives is increasing at a growing rate gradually

but with the lowest amount. The FDI of Nepal is also increasing gradually from the year

1996. Bhutan is recently getting opportunities of FDI. So, in this graph we can conclude

that, Bangladesh is the highest position for getting inward FDI stock. The data of inward

FDI stock of South Asian LDCs of period 1980-2008 are attached into the appendix.

5.3.2 Inward FDI Stock as Percentage of GDP

Figure-14: Year-wise Inward FDI Stock of South Asian LDCs


8/4/2019 FDI