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This Report is prepared for evaluating the overall prospects as well as problems of foreign
direct investment (FDI) in Bangladesh.
We thank our course instructor Prof. Dr. Howlader Md. Mosarof Hossain for his kind guidance,
advice and encouragement during the course of and also in the time being of preparing this term
paper on the overall prospects and problems of foreign direct investment (FDI) in Bangladesh. His
encouragement and praise during the course has encouraged us to prepare this report. We also duly
appreciate him for extending his helping hand whenever we need.
We also thank our family members, friends and everyone who helped us in creating this report.
We couldnt have done it without their help and support.
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Sources of Information:
i.
Primary data Source: Primary data sources are used for preparing this term paper is
a. The Board of Investment (BOI)
b. Bangladesh Bank &
c. Bangladesh Bureau of Statistics,
d. Bangladesh Export Processing Zone, etc.
ai. Secondary data Source: Secondary data are collecting from various papers supplements like
a. The Financial Express,
b. The Daily Star, etc. newspapers,
c. Internet
d. Books are studied.
e. Exchange of views from different people also played a significant role to do the
Study.
time this is downward moving. So what is the reason behind that is the objective of the study
as a whole. The analysis of the report is supported by some theoretical arguments that enhance
the overall findings and guide towards a reasonable recommendation.
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Importance of FDI
In Bangladesh the countrys savings-investment gap had been mainly bridged by external
economic assistance. However, after the cold war era, the availability of foreign aid is
decreasing gradually. As a result, there is now widespread support for the need for FDI in
Bangladesh. If the economy is to grow faster, as is being envisaged, there is the need for larger
inflow of FDI in Bangladesh with a view to creating jobs for vast labor force, increasing foreign
exchange earnings, acquiring new and modern technology and management skills, accelerating
overall growth and development of the economy. FDI is thought of contributing to economic
development (and therefore poverty reduction) through initial macroeconomic stimulus and by
raising total factor productivity and efficiency of resource use in the recipient economy by:
a. Transferring more advanced technology and organizational forms directly to MNC
affiliates in the host country.
b. Triggering technological and other spillovers to domestically owned enterprise.
c. Assisting human capital formation.
d. Contributing to international trade integration.
e. Helping to create a more competitive business environment.
f. Enhancing enterprise development
g. Improving environmental and social conditions.
Bangladesh has gradually increased its focus on FDI as a major means for raising resources for
its developmental need. However, concerns are being raised about the povertyalleviating
impactofforeigncapitalflow.Thisisparticularlyimportantgiventhefactthatmorethanforty
percentofthepopulationofthecountrylivesinpovertyonthebasisofDirectCalorieIntake
(DCI).BangladeshPRSPreportedthattherateofpovertyreductionduringthe90swasone
percentpointperyear.Ontheotherhand,GDPgrowthrateduringtheperiodwas4.8percentin
realtermsperyear.
Bangladesh has attracted USD 913 million foreign direct investments (FDI) in 2010 calendar
year, a leap by 30 per cent. This upgrades the country's position to 114 from 119 out of 141
nations in the World Investment Report (WIR). During this period the telecom sector received
USD 360 million FDI, the manufacturing sector received USD 238 million in investment from
abroad, USD 145 million in the textile and clothing sector, while leather and leather products
got USD 46 million. (The financial Express, 27 July, 2011)
As a developing country, Bangladesh needs Foreign Direct Investment (FDI) for its ongoing
development process. Since independence, Bangladesh is trying to be a suitable country for
FDI. In order to accelerate economic growth, Bangladesh opened her economy in the late 1980s
to reap the benefits of FDI. In 1989 the government set up Board of Investment (BOI).
The primary objective of which is aimed at attracting and facilitating investment from abroad
(Mondal 2003). The government also lifted restrictions on capital and profit repatriation
gradually and opened up almost all industrial sectors for foreigners to invest either
independently or jointly with the local partners. Further, the government also introduced
various financial and non-financial incentives like tax exemptions for power generations,
import duty exemptions for export processing industries, tax holiday schemes for undertaking
investment in priority sectors and low development areas, zero duty rate for the import of
capital machinery and spare parts for 100 percent export oriented industries, almost no
restrictions on the entry and exit mode, and reduction of bureaucratic hassles in getting faster
approvals of foreign projects. Together with all these incentives followed by a low labor cost
structure, Bangladesh has been an attractive destination for FDI in the South Asian region since
the late 1980s.
The trend of Inflow of FDI in Bangladesh has increased over the 1980s as compared to earlier
periods and this same momentum continues in 1990s as well. The total inflow of FDI has been
increasing over the years. During the period of 1977-2010, total inflows of FDI were USD
8927.9 million, among which the total inflows of FDI during 2006-2010 was USD
4158.63 million. In 1977, this inflow was USD 7 million and in 2008, annual FDI reached to
USD 1086.31 million. Unfortunately, there was a declination in inflows of FDI in 2010 which
was USD 913.32million (Source: Survey Report, Statistics Department, Bangladesh Bank).
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The figure 3.1 shows an inconsistent proceeding of FDI inflows during the period. In 1999
there was a sudden decline in the FDI and the falling trend continued for many reasons again in
2001, 2002 and 2003. Serious political unrest during the period discouraged foreign investment
and it took quite some time to regain the confidence of foreign investors. There were also some
other factors that force this declination in the inflows. After that, there was very good news for
Bangladesh. The FDI inflow was on the steady rise from 2003 to 2005. It rose to US$ 1086.3
million in 2008 but slumped to US$ 700.16 in 2009 and again increased to $913.32.
growth in the developing countries. Bangladesh Government has adopted several policy
measures to boost the FDI flow in Bangladesh. The government of Bangladesh has listed the
following five areas in which FDI should be encouraged under joint venture and 100%
ownership by the foreigners:
a) Export oriented industries
b) Industries located in the Export Processing Zones (EPZs)
c) Industries that are based on high technology, which will either be import substitute
or export oriented
d) Basic industries based mainly on local raw materials and investment towards
improvement of quality and marketing of goods manufactured and/or the increase of
production capacities of existing industries
e) Physical infrastructure projects on Build-Operate-Own (BOO) and Build-OperateTransfer (BOT).
In Bangladesh, FDI has to be registered either with the Bangladesh Export Processing Zone
Authority (BEPZA) for investing in an EPZ, or with the Board of Investment (BOI) in the case
of investing within the country but outside of EPZ. This registration process is to enable the
investors to avail themselves of the necessary government policy support and receive
certification to relieve the difficulties often experienced in dealing with the various public
enterprises.
Some of the recent major measures undertaken by the government to attract FDI are:
a) Private Export processing Zone Act has been enacted. Korea has set up a private EPZ at
Chittagong.
b) A Regulatory Reform Commission (RRC) has been set up.
c) A permanent Law Reform Commission has been set up to ensure greater transparency
and predictability in the way rules and regulations work.
d) An Administrative Reform Commission has been set up
e) The company law 1913 has been updated and revised in 1994.
f) Power generation in the private sector has been allowed.
g) Telecommunication in the private sector has been allowed.
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h) Multiple entry visas to visiting foreign investors are being given by all the Bangladesh
missions abroad.
i) Provision made for allowing import of standby generators free of tax and sale of
excess electricity to nearby industrial units without permission from any agency
provided own distribution line is used.
j) Licenses issued to six cellular telecom phone operators, which illustrate governments
commitment to a competitive and market economy.
ix) Term loans and working capital loans from local banks
x) Avoidance of double taxation on the basis of bilateral agreement
xi) Tax exemption on the interest of payable to foreign loans and on royalties and
technical know-how fees
xii) Open exchange control
xiii)
xiv)
xv) Protection of foreign investment through The Foreign Private Investment Act-1980
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Figure: FDI Inflows (in million USD) by countries during 1996-2010. Source: Board of Investment,
Bangladesh.
[
The figure shows that United Kingdom has gained the top most position among the top 10 investing
countries in Bangladesh during 1996-2010 in investing in various sectors of economy. Out of total FDI
inflows from the top 10 investing countries during this period, 17.4% was from United Kingdom, 13%
from USA, 8% from Egypt, 7.7% from South Korea, 6.4% from Netherlands, 6.2% from Singapore,
5.6% from Hong Kong, 5.2% UAE, 4.8% from Japan, 4.7% from Norway.
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Bangladesh offers generous opportunities for investment under its liberalized Industrial Policy
and export-oriented, private sector-led growth strategy. All but four sectors
Forest plantation and mechanized extraction within the bounds of reserved forests
The governments role is that of a facilitator which helps create an enabling environment for
expanding private investment, both domestic and foreign. The Board of Investment (BOI),
established by the government for accelerating private investment, provides institutional
support services to intending investors.
Prospects of FDI
Bangladesh has been promoting FDI for decades with the most liberal investment policy and
incentive regime in South Asia. The Foreign Private Investment (Promotion and Protection)
Act, 1980, ensures equal treatment for local and foreign Investors. This act also provides legal
protection to foreign investment in Bangladesh against nationalization and expropriation. It also
gives the guarantee of repatriation of capital and dividend.
Bangladesh has achieved a consistent GDP growth of over 5% in the last decade and never
experienced a negative growth. Even Bangladesh sustained growth of over 5% during the recent
global economic crisis. In 2009 Bangladesh achieved a 5.9% GDP growth. Various necessary
steps like generation of huge number of SMEs, success in microcredit and NGO activities, rapid
spread of telecommunications services, record level of foreign remittances, acceleration of
export earnings are taking the economy at a higher level of growth. Its investment friendly
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climate offers generous and attractive packages of incentives for foreign investors like 100%
ownership, tax and duty exemptions and others. Actually, Bangladesh has gained a higher
ranking than many developing countries in terms of incentive package. A lot of additional fiscal
incentives are offered to export oriented industries. The government has created Export
processing zones (EPZs) to attract private investment. The government targets foreign investors
to invest in EPZ.
The vision is that the unique opportunities in energy and power, infrastructures, manufacturing
and knowledge-based sectors will attract substantial investment. Bangladesh has become a least
cost producer in the world with various positive factors like industrious low-cost workforce,
strategic location, regional connectivity and worldwide access, strong local market and growth,
low cost of energy, proven export competitiveness, competitive incentives, export and
economic zones, positive investment climate.
Tax holiday facilities are provided in accordance with existing laws. The period of tax
holiday will be calculated from the month of commencement of commercial production.
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Tax holiday certificate will be issued by NBR (National Board of Revenue) for the total
period within 90 days of submission of application.
Tax exemption
Tax exemptions are allowed in the following cases Tax exemption on royalties, technical know-how fees received by any foreign
collaborator, firm, company and expert.
Exemption of income tax up to 3 years for foreign technicians employed in industries
specified in the relevant schedule of the income tax ordinance.
Tax exemption on income of the private sector power generation company
for 15
Accelerated depreciation
Industrial undertakings not enjoying tax holiday will enjoy accelerated depreciation
allowance. Such allowance is available at the rate of 100 per cent of the cost of the
machinery or plant if the industrial undertaking is set up in the areas falling within the
cities of Dhaka, Narayangonj, Chittagong and Khulna and areas within a radius of 10
miles from the municipal limits of those cities. If the industrial undertaking is set up
elsewhere in the country, accelerated depreciation is allowed at the rate of 80 per cent in
the first year and 20 per cent in the second year.
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Private investment from overseas sources is welcome in all areas of the economy with
the exception of the four reserved sectors (mentioned earlier). Such investments can be
made either independently or through venture on mutually beneficial terms and
conditions. Foreign investment is, however, especially desired in the following major
categories of industries:
Export oriented industries;
Industries in the Export Processing Zones (EPZs)
High technology products that will be either import substitute or export oriented.
Foreign Equity:
For foreign direct investment, there is no limitation pertaining to foreign equity
participation, i.e. 100 percent foreign equity is allowed. Non-resident institutional or
individual investors can make portfolio investments in stock exchanges in Bangladesh.
Foreign investors or companies may obtain full working loans from local banks. The
terms of such loans will be determined on the basis of bank-client relationship.
Entrepreneurs facility:
Foreign entrepreneurs are, therefore, entitled to the same facilities as domestic
entrepreneurs with respect to tax holiday, payment of royalty, technical know-how fees
etc.
Work permit:
The process of issuing work permits to foreign experts on the recommendation of
investing foreign companies or joint ventures will operate without any hindrance or
restriction. Multiple entry visa will be issued to prospective foreign investors for 3
years. In the case of experts, multiple entry visa will be issued for the whole tenure of
their assignments.
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Legal Protection
The policy framework for foreign investment in Bangladesh is based on The Foreign
Private Investment (Promotion & Protection) Act 1980 which ensures legal protection to
foreign investment in Bangladesh against nationalization and expropriation. It also
guarantees non-discriminatory treatment between foreign and local investment, and
repatriation of proceeds from sales of shares and profit.
International Agreements
Bangladesh has concluded bilateral agreements for avoidance of double taxation and
investment treaties for promotion and protection of investment with the following
countries:
Bilateral agreements
Belgium, Canada, China, Denmark, France, Germany, India, Italy, Japan, Poland,
Romania, Singapore, South Korea, Sri Lanka, Sweden, Thailand, The Netherlands,
United Kingdom ( including Northern Ireland ). Negotiations are ongoing with U.S.A,
Iran, Philippines, Qatar, Australia, Nepal, Turkey, Indonesia, Cyprus, Norway, Finland
and Spain.
Investment treaty
Belgium, Canada, France, Germany, Iran, Italy, Japan, Malaysia, Pakistan, Philippines,
Poland, Republic of Korea, Romania, Switzerland, Thailand, The Netherlands, Turkey,
United Kingdom, USA, Indonesia. Negotiations are ongoing with India, Hungary,
Oman, Moldova, DPRK, Egypt, Austria, Mauritius, and Uzbekistan.
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Bangladeshi companies. A quota of 10% has been fixed for NRBs in primary public
shares. Furthermore, they can maintain foreign currency deposits in the Non-resident
Foreign Currency Deposit (NFCD) account.
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3. Human Resources: We have a population of 160 million who are hard working and
generally intelligent. There is an abundant supply of disciplined, easily trainable, and low-cost
workforce suitable for any labor- intensive industry.
4. Social Stability: Bangladesh is a liberal democracy and mostly a one race and one religion
country. The population of this country irrespective of race or religion have been living in total
harmony and understanding for thousands of years.
5. Language: Although Bengali is the official language, but English is generally used as second
language. Majority of even moderately educated population can read, write and speak in
English.
6. Market Access: As a result of low per capita GDP of only US$956, present domestic
consumption is not significant. However, it should always be considered that there exists a
middle class with some purchasing power. As economic growth picks up, the purchasing power
will also grow substantially. And in a country of more than 160 million people, even a small
middle class may constitute a significant market.
7. GSP Facility: Most Bangladeshi products enjoy complete duty and quota free access to EU,
Japan, USA, Australia and most of the developed countries. However, for apparel export to
USA, we have certain quota regime which is generally favorable to Bangladesh.
Governance
Governance of a country comprises economic and business policy and regulations such
as taxation system and tax rate, interest and Bank rate, drive against corruption etc. All
this factors are related with the cost business and profit. Foreign investors very
consciously consider the governance of a country to invest. An important aspect of
governance is the ease with which investors can enter and exit a market. It is an
important determinant of productivity, investment and entrepreneurship.
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International integration
International integration is another determinant that drives investment. Countries that
aggressively pursue integration with the global economy grow more quickly than those
that did not. The low level of incoming FDI in indicates poor integration with the global
economy.
Political stability
Political factors like change of government, attitude of opposition group, transparency
in bureaucracy, degree of nationalism, corruption, terrorism etc. are seriously considered
by the investors in pre-investment decision making. For example, in case of Bangladesh
the most sensitive issue for discouragement of the FDI is political unrest and corruption.
Human resources
Skilled workforce leaves a country at an ease to attract investment. Development
programs financed by the FDI may be interrupted for the absence of skills and adequate
knowledge infrastructure. Low growth that takes place in trade and investment is the
result of the use of unskilled cheap labor. Bangladesh is a country where there is ample
scope for development of human resources. It is a shame for the planners that thousands
of Indians and other foreign nationals are employed in the top positions of most of the
multinational and national corporations.
Technology infrastructure
Economic growth of a country largely depends on technological progress, which
stimulates FDI. It includes more modest advances, implementation of better business
processes, and involves the adoption of new technologies. In this area, again,
Bangladesh lags behind in comparison to its competitors.
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Complicated Bureaucracy
The country has a bureaucratic system that is not at all compatible with an investment
environment. The concrete implementation of investment related policies are pro-longed
to obstruct both local and foreign investors. An inefficient and dishonest bureaucratic
system is extensively responsible for the absence of FDI in the country.
Political Unrest
The political situation in Bangladesh is extremely vulnerable because of the continuous
hostility among the political parties, which in turn pollutes the entire investment
environment. It is unfortunate that Bangladesh is an exception where most of the
political violence centered on industries. Even EPZs are not exempted by any means.
However, the situation has been apparently improved since the present interim
government has taken over.
Corruption
Culture and society have become corrupted through sick politics. The bureaucrats and
regulatory bodies are steeped in corruption. For business enterprise, corruption works as
taxation or lubrication cost. Many companies regard bribery as just one of the costs of
doing business (Lubrication Cost) and show these payments as legitimate business
expenses. However the current situation in this regard is as gloomy as it was in the past.
energy, ports, aviation, railways, banking and many other sectors. All these sector
inefficiencies push the total cost of local and foreign businesses extensively high.
Differential Treatment
Though are regulations to provide equal treatment of local and foreign investors, certain
inequitable conventions are practiced with the foreign investors. Such inequalities are
evident in cases of authorization necessities for foreign investment, barriers against
capacity expansion, suppliers credit, etc.
this scandal.
Legal Absurdity
The system of legal suits and actions prolonged over the years puts business investors in
a dilemma about placing their precious capital in businesses in Bangladesh.
Recommendation
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Conclusion
Same as most other developing and least developed countries, Bangladesh also considers
Foreign Direct Investment (FDI) as an important resource for development. In order to attract
more and more FDI, the country undertook a massive liberalization of its investment program.
The Board of Investment (BOI) was established in 1989 by the Investment Board Act to
encourage investment in private sector, to identify the hindrance of investment and provide
necessary facilities and assistance in the establishment of industries.
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That is why potential investors from local and foreign countries have grown substantially in
sectors like manufacturing, telecommunication, energy and gas sectors in addition to other
sectors or sub-sectors being very promising for potential private investment. The FDI is 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. When a country
has a situation of low cost of production and stable political situation that country is generally
the best choice for FDI. Until the 1980s, most developing countries viewed FDI with great
weariness as it has also some bad sides because it exploits the cheap labor of our country. We
have a huge amount of active and strong manpower. That's why they come to our country in the
name of FDI but in return they actually exploit us. Besides, they use our natural resources
recklessly. So, our natural resources like gas and other things are going to be exhausted. They
earn a lot of profit every year and take away to their country but they do not reinvest it in our
country. Another most important thing is influencing power in government decision. Since they
are giant companies, they have a powerful influential capacity in government decision. So there
is a possibility of losing the sovereignty of a country. Actually, disadvantage is a matter of fact.
If there is proper government control over the company, it becomes advantages most of the
times. In recent years, however FDI restrictions have been significantly reduced. Most countries
offer incentives to attract FDI, such as tax concessions, tax holidays, accelerated depreciation
on plants and machinery, export subsidies and import entitlements etc. As a developing country,
Bangladesh needs FDI for its ongoing development activities.
On the other side there are a lot of advantages of FDI. A huge number of unemployed people
are employed due to FDI. So, the standard of living is increased due to the increase of income
level of the unemployed people. Their purchasing power is increased that's why the business
cycle moves at a good speed. Other sides like roads, communication system, transportation
facilities, and education are also improved at a greater speed. Competition is increased in the
local market with the local companies. That's why price of the product starts to fall down. Gross
Domestic Product (GDP) is increased due to increased production in the economy. Another
advantage is that we can use our unutilized resources by FDI.
Problems that have restricted FDI potentials in Bangladesh include excessive bureaucratic
interference, alleged irregularities in processing papers, lack of commitment on the part of local
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investors, inordinate delays in selecting projects for feasibility studies, and frequent changes in
policies on import duties for raw materials, machinery and equipment. Overlapping
administrative procedures and absence of a transparent system of formalities and recognized
dissemination of facts often confuse not only investors proposing projects, but also staff and
personnel assigned for discharging procedural responsibilities. 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. An additional
problem is the lack of professional personnel, i.e., the technical, managerial and innovative
skills in the country needed to efficiently handle entrepreneurial function including risk taking,
planning and coordination and control.
However, competitive strength of Bangladesh for investment is good. It is the government who
should come forward to take all the initiatives to make the outside people interested about our
economy to rise and the opportunity for the investors to invest in our country.
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