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Chapter-01
Introduction

The Impact of Foreign Direct Investment and Portfolio Investment on


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1.1 Introduction
Investment has acquired considerable emotive force in any country. It is viewed as beneficial
on employment creator-as it brings about economic development. It can termed capital
flowing from a firm or individual within the country or in one country to a business or
businesses in another country involving a share of at least 10%. So the significance of
investment in a country is:
It increases the economic growth by sustain increase in real, per capita, national
product. This brings -National income effect, Balance of payment effect & Public
revenue effect.
Accelerate the industrial innovation this develops in integrations take a variety form
which is not necessarily mutually exclusive.
It increases Political modernization in the degree where it function are collective
oriented, universalistic specific and achievement oriented.
It also brings infrastructural development & modern nationalism.
From discussing the significance on investment it is two forms:
Local (Portfolio) investment.
Foreign Investment.
Investments come from a firm or individual within the country is domestic or local
investment. Investment or capital come from a firm in one country to a business or
businesses in another country is called foreign investment.
The investment situation in Bangladesh is consisting of Private vs. Public and Local vs.
Foreign investment. The economy in Bangladesh has been gradually drawing the attention of
private sector investors since its opening up in early 90s manufacturing is becoming
increasingly vibrant Claiming a significant share in the total investment.

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1.2 Rational of the Study:


National equity flows are the main feature of the recent develops of capital markets both in
developing and in developed economies. These flows take two major forms: Foreign Direct
Investments (FDI) and Portfolio Investments (PI). An empirical regularity is that the share of
FDI in total foreign equity flows is larger for developing countries than for developed
countries. Regarding the second moments of foreign equity flows, it is known that the
volatility of FDI net inflows is, in general, much smaller than that of FPI net inflows.
Moreover, empirical analysis has established that the differences in volatility between FPI
and FDI flows are much smaller for developed economies than for developing economies.
Despite the empirical interest in foreign equity flows, very little work has been done on
jointly explaining FDI and PI in a rigorous theoretical framework. In this paper, we propose
such a framework, and provide a model of a tradeoff between FDI and PI, which is consistent
with the empirical facts mentioned above.

1.3 Objective of the study:


This study is conducted with the objective to get an overall insight in the flow of FDI and PI
in Bangladesh. The total objective is decomposed into several parts to get idea about the
factors affecting the flow of FDI and PI. The specific objectives of this study are:
To give an insight into the theoretical issues relating to FDI and PI
To highlight the role of multinational corporation in FDI and PI.
To give an overview of FDI and PI in Asian Countries.
To focus on the administration of FDI and PI in Bangladesh.
To evaluate the status of FDI and PI in Bangladesh
To identify the problem of FDI and PI & prescribe some issues for their solution.

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1.4 Scope of the study:


The primary scope of this paper is to get acquainted with the flow of foreign direct
investment. The study will cover the scenario of FDI and PI flow currently in Bangladesh.
Comparative analysis of statement of sector wise distribution of FDI and PI in Bangladesh
and sources of FDI has been presented. The findings will be strictly structured upon the data
provided by the Directorate of Board of Investment (BOI).

1.5 Methodology of the study:


i.

Primary data Source:

Primary data sources are used for preparing this project paper is the Board of Investment
(BOI), Bangladesh Bank &Bangladesh Burro of Statistics, Bangladesh Export Processing
Zone, etc.
ii.

Secondary data Source:

Secondary data are collecting from various papers supplements like


The Financial Express,
The Daily Star, etc. newspapers,
Internet
Books are studied.
Exchange of views from different people also played a significant role to do the
Study.

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1.6 Limitations of the study:


Although I tried to find and set the causes that determine the shape of the flow of FDI and PI,
I believe Im not at the best peak. I have relied extensively on published data and other
secondary sources to precede the report. But some of those sources were not approachable
and we lacked from data of that sources. In analyzing the report I have presented some
factors that determine the shape of the flow of FDI and PI. But these are not surely the only
factors and many important factors may be omitted from the analysis. And another thing is
that the underlying factors are mostly in qualitative factors in nature and therefore cannot be
measured in numerical way. The consequences are that we failed to provide absolute
guideline about restructuring policy and some other decisions. The finding of the report is
based on some assumed scenario and changes on those scenarios may reshape the future flow
of FDI and PI. That is the analysis is situation and time based. The biggest problem we faced
in the reporting period is the paradoxical data set. I have three sets of data in regard to the
FDI, but all that provides us contradictory result. Board of Investment does not confirm what
the Bangladesh bank published and vice versa. On the other hand the recording of FDI and PI
data is almost a new concept in our country. As a result I present the FDI and PI data which I
believe more accurate in best of my knowledge for the related periods.

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Chapter-02
Theoretical Aspects

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2.1 Literature review:


The investment literature highlight the importance of distinguishing between foreign direct
investment and portfolio investment, in order to understand the potential economic growth
incurred by developing countries. It is argued that only foreign direct investment (FDI)
carries the seeds that can lead towards stable economic growth. Portfolio investment (PI)
high volatility cannot ensure sustained economic growth.
The current literature recognizes that the risks associated with portfolio investment are
mainly due to the difficulties in realizing foreign direct investments. A foreign investor
choosing to invest in a recipient or host country faces higher entry costs for direct
participation within an industry, due to initial setup costs and uncertainty about fundamentals
(i.e. asymmetric information at the entry level), and higher exit costs due to the difficulty of
reselling a firm (i.e. asymmetric information at the exit level). These costs increase the
observed volatility associated with portfolio investments, since only the foreign investors
with superior managerial skills will commit to FDI.
Hence, both foreign direct and portfolio investments are plausible investment choices, with
opposite characteristics (in terms of risk-returns) and with opposite effects on a recipient
countrys potential for economic growth. Multiple equilibria can arise since there is an
information-based trade-off between direct investments and portfolio investments. In
particular, informational asymmetries due to the different natures of FDI- and PI-type
investment projects and to the degree of (institutional, capital markets and corporate
governance) transparency can tilt investor decisions towards one form of in-vestment versus
another. Point out how an economy might go through boom-bust cycles of investment
supported by self-fulfilling expectations.
This paper formalizes a model of investment under uncertainty (due to informational
asymmetries and noise in the degree of transparency) using a global games approach. 2 We
show that uncertainty does not by itself imply a multiplicity of investment outcomes even
when there is an information-based trade-off between direct investments and portfolio
investments and noise in the degree of transparency. In our framework uncertainty about the
degree of transparency always helps pin down an equilibrium (i.e. state-contingent) strategy
and hence an equilibrium outcome from the set of possible multiple equilibrium that exist.

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Our work shows that the conditions which link foreign direct investments to portfolio
investments always lead to a clear-cut outcome about investment decisions. In our model
rational agents exploit the higher order beliefs determined by the degree of noise in
transparency by endogenously affecting the information-based trade-off uncovered. This
enables them to pin down an equilibrium strategy and to select individual equilibrium
outcomes that may lead the recipient country to end up with a larger (smaller) share of FDI
relative to PI.
The rest of the paper is structured as follows. Section 2 motivates our work by reviewing
recent empirical and theoretical contributions in the literature on investment flows among
countries. We highlight some stylized facts that help us develop our model, which is described in Section 3 in the case of complete information. The role of higher order beliefs in
determining equilibrium strategies is analyzed in Section 4 in the case of incomplete
information. Section 5 concludes and discusses the normative implications and possible
extensions of our work.

2.2 Portfolio Investment (PI)


A portfolio investment is a passive investment in securities, which entails no active
management or control of the securities by the investor. A portfolio investment is an
investment made by an investor who is not particularly interested in involvement in the
management of a company. The purpose of the investment is solely financial gain.
It includes investment in an assortment or range of securities, or other types of investment
vehicles, to spread the risk of possible loss due to below-expectations performance of one or
a few of them.
The provision of capital to a company in exchange for the possibility of earning a return on
that capital if the company is profitable. Someone who makes a portfolio investment does not
acquire any management interest in the company or any responsibility for the company's
performance. A portfolio investment is a hands-off investment.

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Portfolio investment process


The ultimate aim of the portfolio manager is to reduce the risk and increase the return to the
investor in order to reach the investment objectives of an investor. The manager must be
aware of the investment process. The process of portfolio management involves many logical
steps like portfolio planning, portfolio implementation and monitoring. The portfolio
investment process applies to different situation. Portfolio is owned by different individuals
and organizations with different requirements. Investors should buy when prices are very low
and sell when prices rise to levels higher that their normal fluctuation.
Portfolio investment process is an important step to meet the needs and convenience of
investors. The portfolio investment process involves the following steps:
1. Planning of portfolio
2. Implementation of portfolio plan.
3. Monitoring the performance of portfolio.

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1) Planning of portfolio:
Planning is the most important element in a proper portfolio management. The success of the
portfolio management will depend upon the careful planning. While making the plan, due
consideration will be given to the investors financial capability and current capital market
situation. After taking into consideration a set of investment and speculative policies will be
prepared in the written form. It is called as statement of investment policy. The document
must contain (1) The portfolio objective (2) Applicable strategies (3) Investment and (4)
speculative constraints. The planning document must clearly define the asset allocation. It
means an optimal combination of various assets in an efficient market. The portfolio manager
must keep in mind about the difference between basic pure investment portfolio and actual
portfolio returns. The statement of investment policy may contain these elements. The
portfolio planning comprises the following situation for its better performance:
(A) Investor Conditions: - The first question which must be answered is this What is the
purpose of the security portfolio? While this question might seem obvious, it is too
often overlooked, giving way instead to the excitement of selecting the securities
which are to be held. Understanding the purpose for trading in financial securities will
help to: (1) define the expected portfolio liquidation, (2) aid in determining an
acceptable level or risk, and (3) indicate whether future consumption (liability needs)
are to be paid in nominal or real money, etc. For example: a 60 year old woman with
small to moderate saving probably (1) has a short investment horizon, (2) can accept
little investment risk, and (3) needs protection against short term inflation. In contrast,
a young couple investing couple investing for retirement in 30 years has (1) a very
long investment horizon, (2) an ability to accept moderate to large investment risk
because they can diversify over time, and (3) a need for protection against long-term
inflation. This suggests that the 60 year old woman should invest solely in lowdefault risk money market securities. The young couple could invest in many other
asset classes for diversification and accept greater investment risks. In short, knowing
the eventual purpose of the portfolio investment makes it possible to begin sketching
out appropriate investment / speculative policies.

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(B) Market Condition: - The portfolio owner must known the latest developments in the
market. He may be in a position to assess the potential of future return on various
capital market instruments. The investors expectation may be two types, long term
expectations and short term expectations. The most important investment decision in
portfolio construction is asset allocation. Asset allocation means the investment in
different financial instruments at a percentage in portfolio. Some investment
strategies are static. The portfolio requires changes according to investors needs and
knowledge. A continues changes in portfolio leads to higher operating cost. Generally
the potential volatility of equity and debt market is 2 to 3 years. The another type of
rebalancing strategy focuses on the level of prices of a given financial asset.
(C) Speculative Policies: - The portfolio owner may accept the speculative strategies in
order to reach his goals of earning to maximum extant. If no speculative strategies are
used the management of the portfolio is relatively easy. Speculative strategies may be
categorized as asset allocation timing decision or security selection decision. Small
investors can do by purchasing mutual funds which are indexed to a stock.
Organization with large capital can employ investment management firms to make
their speculative trading decisions.
(D) Strategic Asset Allocation: - The most important investment decision which the owner
of a portfolio must make is the portfolios asset allocation. Asset allocation refers to
the percentage invested in various security classes. Security classes are simply the
type of securities:
(1) Money Market Investment,
(2) Fixed Income obligations;
(3) Equity Shares,
(4) Real Estate Investment,
(5) International securities.
Strategic asset allocation represents the asset allocation which would be optimal for the
investor if all security prices trade at their long-term equilibrium values that is, if the markets
are efficiency priced.

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2) Implementation of portfolio plan


In the implementation stage, three decisions to be made, if the percentage holdings of various
assets classes are currently different from the desired holdings as in the SIP, the portfolio
should be rebalances to the desired SAA (Strategic Asset Allocation). If the statement of
investment policy requires a pure investment strategy, this is the only thing, which is done in
the implementation stage. However, many portfolio owners engage in speculative transaction
in the belief that such transactions will generate excess risk-adjusted returns. Such
speculative transactions are usually classified as timing or selection decisions. Timing
decisions over or under weight various assets classes, industries, or economic sectors from
the strategic asset allocation. Such timing decision deal with securities within a given asset
class, industry group, or economic sector and attempt to determine which securities should be
over or under-weighted.
(A) Tactical Asset Allocation: - If one believes that the price levels of certain asset classes,
industry, or economic sectors are temporarily too high or too low, actual portfolio
holdings should depart from the asset mix called for in the strategic asset allocation.
Such timing decision is preferred to as tactical asset allocation. As noted, TAA
decisions could be made across aggregate asset classes, industry classifications (steel,
food), or various broad economic sectors (basic manufacturing, interest-sensitive,
consumer durables).
Traditionally, most tactical assets allocation has involved timing across aggregate asset
classes. For example, if equity prices are believes to be too high, one would reduce the
portfolios equity allocation and increase allocation to, say, risk-free securities. If one is
indeed successful at tactical asset allocation, the abnormal returns, which would be
earned, are certainly entering.
(B) Security Selection: - The second type of active speculation involves the selection of
securities within a given assets class, industry, or economic sector. The strategic asset
allocation policy would call for broad diversification through an indexed holding of
virtually all securities in the asset in the class. For example, if the total market value of
HPS Corporation share currently represents 1% of all issued equity capital, than 1% of

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the investors portfolio allocated to equity would be held in HPS corporation shares.
The only reason to overweight or underweight particular securities in the strategic asset
allocation would be to offset risks the investors faces in other assets and liabilities
outside the marketable security portfolio. Security selection, however, actively
overweight and underweight holding of particular securities in the belief that they are
temporarily mispriced.
(3) Monitoring the performance of portfolio
Portfolio monitoring is a continuous and ongoing assessment of present portfolio and the
portfolio manger shall incorporate the latest development which occurred in capital market.
The portfolio manager should take into consideration of investors preferences, capital
market condition and expectations. Monitoring the portfolio is up-grading activity in asset
composition to take the advantage of economic, industry and market conditions. The market
conditions are depending upon the Government policy. Any change in Government policy
would reflect the stock market, which in turn affects the portfolio. The continues revision of a
portfolio depends upon the following factors:
Change in Government policy.
Shifting from one industry to other
Shifting from one company scrip to company scrip.
Shifting from one financial instrument to another.
The half yearly / yearly results of the corporate sector
Risk reduction is an important factor in portfolio. It will be achieved by a diversification of
the portfolio, changes in market prices may have necessitated in asset composition. The
composition has to be changed to maximize the returns to reach the goals of investor.

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2.3 Foreign direct investment


Foreign direct investment (FDI) is a direct investment into production or business in a
country by an individual or company of another country, either by buying a company in the
target country or by expanding operations of an existing business in that country. Foreign
direct investment is in contrast to portfolio investment which is a passive investment in the
securities of another country such as stocks and bonds.

2.3.1 Definitions
Broadly, foreign direct investment includes "mergers and acquisitions, building new
facilities, reinvesting profits earned from overseas operations and intra company loans". In a
narrow sense, foreign direct investment refers just to building new facilities. The numerical
FDI figures based on varied definitions are not easily comparable.
As a part of the national accounts of a country, and in regard to the GDP equation Y=C+I+G+
(X-M)[Consumption + gross Investment + Government spending +(exports - imports], where
I is domestic investment plus foreign investment, FDI is defined as the net inflows of
investment (inflow minus outflow) 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.
FDI is the sum of equity capital, other long-term capital, and short-term capital as shown the
balance of payments. FDI usually involves participation in management, joint-venture,
transfer of technology and expertise. There are two types of FDI: inward and outward,
resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment",
which is the cumulative number for a given period. Direct investment excludes investment
through purchase of shares. FDI is one example of international factor movements.

2.3.2 Types
1.

Horizontal FDI arises when a firm duplicates its home countrybased activities at the same value chain stage in a host country
through FDI.

2.

Platform FDI Foreign direct investment from a source country into


a destination country for the purpose of exporting to a third country.

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3.

Vertical FDI takes place when a firm through FDI moves upstream or
downstream in different value chains i.e., when firms perform valueadding activities stage by stage in a vertical fashion in a host country

2.3.3 Methods
The foreign direct investor may acquire voting power of an enterprise in an economy through
any of the following methods:
by incorporating a wholly owned subsidiary or company anywhere.
by acquiring shares in an associated enterprise.
through a merger or an acquisition of an unrelated enterprise.
participating in an equity joint venture with another investor or enterprise.

2.3.4 Forms of FDI incentives


Foreign direct investment incentives may take the following forms:

low corporate tax and individual income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

EPZ Export Processing Zones

Bonded Warehouses

Maquiladoras

investment financial subsidies

soft loan or loan guarantees

free land or land subsidies

relocation & expatriation

infrastructure subsidies

R&D support

derogation from regulations (usually for very large projects)

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Governmental Investment Promotion Agencies (IPAs) use various marketing strategies


inspired by the private sector to try and attract inward FDI, including Diaspora marketing.

2.3.5 Importance and barriers to FDI.


The rapid growth of world population since 1950 has occurred mostly in developing
countries. This growth has been matched by more rapid increases in gross domestic product,
and thus income per capita has increased in most countries around the world since 1950.
While the quality of the data from 1950 may be of question, taking the average across a range
of estimates confirms this. Only war-torn and countries with other serious external problems,
such as Haiti, Somalia, and Niger have not registered substantial increases in GDP per capita.
The data available to confirm this are freely available.
An increase in FDI may be associated with improved economic growth due to the influx of
capital and increased tax revenues for the host country. Host countries often try to channel
FDI investment into new infrastructure and other projects to boost development. Greater
competition from new companies can lead to productivity gains and greater efficiency in the
host country and it has been suggested that the application of a foreign entitys policies to a
domestic subsidiary may improve corporate governance standards. Furthermore, foreign
investment can result in the transfer of soft skills through training and job creation, the
availability of more advanced technology for the domestic market and access to research and
development resources. The local population may be able to benefit from the employment
opportunities created by new businesses.

2.3.6 Factors Affecting Foreign Direct Investment:


Because Foreign Direct Investment can significantly affect a countrys economy, the most
influential factors are:
i.
ii.
iii.
iv.

Inflation
National income
Government restriction
Exchange rates

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i.

Impact of Inflation:

If a countrys inflation rate increases relative to the countries with which it invests, its capital
account would be expected to decrease, other things being equal. Consumer and corporations
in that country will most likely purchase more goods or invest more in overseas (due to high
local inflation), while the countrys exports to other countries & flow of investment from
foreign will decline.

ii.

Impact of National Income:

If a countrys income level (national income) increases by a higher percentage than those of
other countries, its capital account is expected to decrease, other things being equal. As the
real income level (adjusted for inflation) raises does consumption of goods. A percentage of
that increase in consumption will most likely reflect an increased demand for foreign
investment.
iii.

Impact of Government Restrictions:

A countrys Government can prevent or discourage investment from other countries. By


imposing such restrictions, the Government disrupts investment flows. Among the most
commonly used investment restriction are bureaucratic tangles, projection of intellectual
property right and f\fiscal policy changes. In addition to these, a Government can reduce its
countrys investment by enforcing laws, or a maximum limit that can be invested.

iv.

Impact of Exchange Rates:

Each countrys currency is valued in terms of other currencies through the use of
exchanges rates, so that currencies can be exchanged to facilitate international transaction.
The values of most currencies can fluctuate over time because of market and government
forces. If a countrys currency begins to rise in value against other currencies, its capital
account balance should decrease, other things being equal. As the currency strengthens,
Investment by that country will become more expensive than the receiving countries.

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2.3.7 Necessity of FDI for a country:


The world has seen a spectacular wave of global corporate activity particularly during the
second half of the last decade. This has been facilitated by advances made in the information
technology. This trend, strengthened with the direction toward border lessEconomies, is drawing more and more TNCs (Trans national corporation) into the global
operation.FDI is no longer only a strategic option of corporations; it also plays a key role in
the national economic development strategies. Various countries are attempting to attract
foreign investors through a variety of measures, i.e. liberalization of investment environment,
fiscal reforms and a package of incentive offers. FDI can transform a countrys economic
scenario within shortest possible time. It is not merely access to fund, but also provide
transfer of technical know-how and management expertise. It is also a stabilizing factor in
any economy, because once TNCs have made an asset-based direct investment, they can not
simply pull out overnight like in the case of portfolio investment. Normally the benefits
accruable from FDI are inclusive of
a. Transfer of technology to individual firms and technological spill-over to the
wider economy.
b. Increased productive efficiency due to competition from multinational
subsidiaries
c. Improvement in the quality of the factors of production including management
in other firms, not just the host firm,
d. Benefits to the balance of payments through inflow of investment funds,
e. Increase in exports
f. Increase in savings and investment and
g. Faster growth and employment.
Thus, foreign direct investment is viewed as a major stimulus to economic growth in
developing countries. Its ability to deal with two major obstacles, namely, shortages of
financial resources and technology and skills, has made it the centre of attention for policymakers in low-income countries in particular.

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2.3.8 Foreign investment opportunity:


Private investment from overseas sources is welcome in all areas of the economy with the
exemption of five industrial sectors (arms, production of nuclear energy, forest plantation and
mechanized extraction within the bounds of reserved forests, security Printing and minting,
air transportation and railways) reserved for public sector. Such investments can be made
either indecently or through joint venture on mutually beneficial terms and conditions. In
other words, 100% foreign direct investment as well as joint venture both with local private
sponsor and with public sector is allowed. Foreign investment, however, is specially desired
in the following categories:

export-oriented industries;

industries in the Export Processing Zones;

high technology products that will be either import-substitute or export-oriented;

undertaking in which more diversified use of indigenous natural resources is possible;

basic industries based mainly only on local raw materials;

investment towards improvement of quality and marketing of goods manufactured


and/or increase of production capacities of existing industries; and

Labor intensive/technology intensive/capital intensive industries.

2.3.9 An objective assessment of environment by a foreign investor for his


decision making process:
In attracting investment, countries must recognize the main reasons that firms invest in
developing countries:

Resource extraction: firms locate in a specific country because of the natural


resource wealth that can be exploited

Market access: firms set up production in a country because of its large domestic
market or its preferential access to regional or global markets

Operating efficiencies: firms locate in a country because of competitive unit costs


(typically labor and transportation costs)

Firms consider different options when selecting an investment site. Hence, countries compete
to attract direct investment. The critical question for developing countries is:

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What are the factors that determine where firm set up direct investments?
The determinants of investment are unique to each circumstance; nonetheless, there are
common themes. Some of the questions that investors ask when considering investing in a
developing country follow:

Are government policies supportive of investment?

Is the political environment stable and predictable?

Is there a well-managed economic framework?

Does the legal framework protect property rights and foreign investors?

How is the relevant industry regulated and structured?

Is the local work force sufficiently trained and healthy?

Is there adequate infrastructure in place?

Are there significant natural resource deposits?

How is the quality of life?

These nine issues are explored in greater detail in the Investment Checklist. This checklist
contains questions that potential investors will consider. With each individual investment,
there is a shifting emphasis as to which are the key factors, hence, the checklist does not rank
the importance of each issue.

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Chapter-03
Role of Multinational
Corporation of FDI

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A review of MNCs activities related to FDI:


MNCs commonly consider direct foreign investment because it can improve their
profitability and enhance shareholder wealth. In most cases, MNCs engage in DFI because
they are interested in boosting revenues, reducing costs, or both.

3.1 Revenue Related Motives:


The following are typical motives of MNCs that are attempting to boost revenues:
3.1.1 Attract new sources of demand:
A corporation often reaches a stage when growth is limited in its home country, possibly
cause of intense competition. Even if it faces little competition, its market share in its home
country may already be near its potential peak. Thus, the firm may consider foreign markets
where there is potential demand. Many developing countries, such as Argentina, Chile,
Mexico, Hungary and China, have been perceived as attractive sources of new demand.
Many MNCs have penetrated these countries since barriers have been removed. Because the
customers in these countries have historically been restricted from purchasing goods
produced by firms outside their countries, the market for some goods is not well established
and offer much potential for penetration by MNCs.
3.1.2 Enter profitable markets
If other corporations in the industry have proved that excessive earnings can be realized in
other markets, an MNC may also decide to sell in those markets. It may plan to undercut the
prevailing, excessively high prices. A common problem with this strategy is that previously
established sellers in a new market may prevent a new competitor attempts to break into this
market.
3.1.3 Exploit monopolistic advantage
Industrial organization theory states that firms may become internationalized if they possess
resources or skills not available in competing firms. If a firm possess advanced technology

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and has exploited this advantage successfully in local markets, the firm may have a more
distinct advantage in markets that have less advantage technology.
3.1.4 React to trade restrictions
In some cases; MNCs use DFI as a defensive rather than aggressive strategy. Specially,
MNCs may pursue DFI to circumvent trade barriers.
3.1.5 Diversify internationally
Since economies of countries do not move perfectly in tandem over time, net cash flow sales
of products across countries should be more stable then comparable sales if the products were
sold in a single country. By diversifying sales (and possibly even production) internationally,
a firm can make its net cash flows less volatile. Thus, the possibility of a liquidity deficiency
is less likely. In addition, the firm may enjoy a lower cost of capital as shareholders and
creditors perceived the MNCs risk to be lower as a result of more stable cash flows.

3.2 Cost Related Motives:


MNCs also engage in DFI in an effort to reduce costs. The following are typical motives of
MNCs that are trying to cut costs:
3.2.1 Fully benefit from economies of scale
A corporation that attempts to sell its primary product in new markets may increase its
earnings and shareholder wealth due to economies of scale (lower average cost per unit
resulting from increased production). Firms that utilize much machinery are most likely to
benefit from economies of scale.
3.2.2 Use foreign factors of production
Labor and land costs can vary dramatically among counties. MNCS often attempt to set up
production in locations where land and labor are cheap. Due to market imperfections such as
imperfect information, relocation transaction costs, and barriers to industry entry, specific
labor cost do not necessarily become equal among markets. Thus, it is worthwhile for MNCs

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to survey markets to determine whether they can benefit from cheaper costs by producing in
those markets.
3.2.3 Use foreign raw materials
Due to transportation costs, a corporation may attempt to avoid importing raw materials from
a given country, especially when it plans to sell the finished product back to consumers in
that country. Under such circumstances, a more feasible solution may be to develop the
product in the country where the raw materials are located
3.2.4 Use foreign technology
Corporations are increasingly establishing overseas plants or acquiring existing overseas
plants to learn the technology of foreign countries. This technology is then used to improve
their own production process and increase production efficiency at all subsidiary plants
around the world.
3.2.5 React to exchange rate movements
When a firm perceives that a foreign currency is undervalued, the firm may consider direct
foreign direct foreign investment in that country, as the initial outlay should be relatively low.

3.3 Comparing Benefits of FDI among countries:


The optimal way for a firm to penetrate a foreign market is partially dependent on the
characteristics of the market. For example, direct foreign investment by U.S. firms is
Common in Europe but not so common in Asia, Where the people are accustomed to
purchasing products from Asians. Thus licensing arrangements or joint ventures may be more
appropriate when firms are expanding into Asia.

3.4

Host Government views of FDI:

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Each government must weigh the advantage and disadvantage of direct foreign investment in
its country. It may provide incentives to encourage some forms of DFI, barriers to prevent
other of DFI, and impose conditions on some other forms of DFI.

Barriers that protect local firms or consumers:

When MNCs consider engaging in DFI by acquiring a foreign company, they may face
various barriers imposed by host government agencies. All countries have one or more
government agencies that monitor mergers and acquisitions. The acquisitions activity in any
given country is influenced by the regulations enforced by these agencies.

Barriers that restrict ownership:

Some governments restrict foreign ownership of local firms. Such restrictions may limit or
prevent international acquisitions.
Red Tape Barriers - An implicit barrier to DFI in some countries is the Red Tape
involved, such as procedural and documentation requirements. A MNCs pursuing DFI is
subject is subject to a different set of requirements in each country. Therefore it is difficult
for MNCs to become proficient at the process it concentrates on DFI within a single foreign
country. The current efforts to make regulations uniform across Europe have simplified the
paperwork required to acquire European firms.

3.5 Impact of the FDI decision on an MNC value:


An MNCs foreign direct investment decision affects its value. Decisions on which countries
to target for expansion affect the revenue generated by the foreign subsidiaries and the
operating expenses of the foreign subsidiaries. Thus the FDI decisions determine the
expected foreign currency cash flows that will be earn by each foreign subsidiary and
therefore affect the expected dollar cash flows ultimate receive by the U.S. parent.
Since the FDI decision by the U.S. parent determine the types of new operations and
locations of foreign operations, they can affect the perceived risk of these operations that are

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supported by the parents FDI. Therefore FDI can affect the MNCs cost of capital, which
also affects the MNCs value.

Chapter-04
FDI and PI
On
Economic Growth in Developed

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4.1

Significance of foreign investment in Bangladesh:

Foreign investment carries enormous significance in a developing country like Bangladesh.


Realizing the importance of foreign investment Bangladesh formulated its first industrial
investment policy in 1973, revised it again in 1974, 1975, and in 1978. Foreign private
investment (Promotion and protection) act, 1980 and the Bangladesh Export Processing
zones authority act 1980 were enacted. To make the foreign investment more attractive new
industrial policy was announced in 1982. However, the industrial policy 1999 is by far the
most comprehensive document. Bangladesh has ever made for investment including foreign
investment.

4.2 The major incentives for foreign direct investment in Bangladesh


are:

Projection of Foreign investment from nationalization and expropriation

Abolition of ceiling on investment and equity share-holding by foreigners

Tax holiday between 5 10 years power generating companies

Accelerated depreciation in lieu of tax holiday on certain simple conditions

Concessionary duty and VAT on capital machinery and spares

Rationalization of import duties and taxes

Six month multiple visa for prospective investors

Citizenship by investing USD 500,000 or transferring USD 1,000,000

Permanent relationship by investing USD 75,000

Tax exemption on capital gains under certain simple conditions

Bonded warehouse and back to back L/C for exporting industries

Avoidance of double taxation with certain countries

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Facilities for repatriation of capital, profit, royalty, technical fee etc.

Tax exemption on royalty, technical know-how and expatriates salary

Protection of intellectual property rights

Taka convertibility in current account

Treating reinvestment of repatriable dividend as new investment.

4.3 Bangladesh in Brief


Bangladeshs 147,570 sq km (roughly the size of England and Wales) are situated on a fertile
alluvial plain formed by large rivers, the Padma and the Jamuna. Its topography is flat with
no great mountains or deserts, and its rivers are vast. Bangladesh is bordered by India to the
north-east and west, Myanmar to the south-east, and the Bay of Bengal to the south.

Economy
From a mainly feudal agrarian base, the economy of Bangladesh has undergone rapid
structural transformation towards manufacturing and services. The contribution of the
agriculture sector to GDP has dwindled from 50 percent in 1972-73 to around 20 percent in
1999-2000. The agricultural sector is, however, still the main employment provider. The
staple crop is rice, with paddy fields accounting for nearly 70% of all agricultural land.
Industrial production growth has averaged more than 6% over the last 5 years. The export
sector has been the engine of industrial growth, with ready-made garments leading the way,
having grown at an average of 30% over the last 5 years. Primary products constitute less
than 10 percent of the countrys exports; the bulk of exports are manufactured/processed
products, ready-made garments and knit wears in particular.

Climate
The climate in Bangladesh is sub-tropical, with temperatures ranging from a daytime low of
18`c in the cold season to a maximum of 40`c in the summer. Annual rainfall ranges from
200 to 400 cm. The country has four main seasons, winter (Dec-Feb), summer (Mar-May),
Monsoon (Jun-Sep) and autumn (Oct-Nov).

Social Development

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Bangladesh has achieved substantial progress in mass literacy, public health, reduction of
population growth and self employment support for rural poor. Primary education is
compulsory and female education is free through the first eight years. The strong
commitment to primary education and to gender equity means that three out of four girls now
enter primary education. In the area of health, over 80% of the countrys children are
immunized against the six `killer` diseases. Infant mortality has decreased significantly.
There has been a sharp decline in the fertility rate.
The increased participation of women in poverty alleviation programs as well as in
Bangladeshs ready-made garments sector, which provides jobs for more than 1 million
women, has helped create an awareness of womens issues at all levels.
An unparalleled concentration of innovative and committed non-governmental organizations
has brought about a micro-credit revolution and guided countless indigent women and
landless households into income generating activities. The safety net programs initiated by
the government in improving the condition of the poorest to a level of survival are proving
effective.

4.4 Socio-Economic Introductory in Bangladesh


Vital Statistics
General Vital Statistics
Population (Million),
Population growth rate (percentage),
Male Female Ratio,
Population Density/Sq. Km.

2001 (Adjusted)
2004(Projected)
2004
2002
2004 (Projected)

130.03
137.2
1.48
105.4
928

Income Distribution and Poverty


Rate of Poverty Based on Cost of Basic Need Method (CBN), (HIES-2000)
Based on Upper poverty Line
National
Rural
Urban

49.80
53.10
36.60

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Based on Lower Poverty line


National
Rural
Urban

33.37
37.40
19.10

Employment and Labor Forces


Labor Force Survey, 2002-03
Number of Civilian Labour Force (Crore)
Male
Female

4.43
3.45
0.98

Percentage of total Labour force


Agricultural Labor

51.69

Industrial Labor (Manufacturing, Power, gas)

13.56

Other Labor

34.75

Transportation (Km.) June 2004


National Highway
Regional Highway
Feeder Road Type-A
Railway
Financial Statistics

3723
4832
13823
2854.96

Total Number of Commercial Banks

49

Local Bank
Foreign Bank

39
10

Financial Institution

28

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4.5 Distribution of private investment projects (local and foreign)


registered with BOI
Investment in EPZs: GDP, Saving and Investment
The real GDP growth rate has been provisionally estimated at 5.52 percent in FY 04. This
marginal increase (0.26 percent) is mainly caused by an increase in production in the industry
and service sector. It is in tune with the Medium Term Macroeconomic Framework (MTMF)
projection at 5.5 percent for the current fiscal year. According to the projection of this
framework the real growth of GDP will rise from 6.0 percent in the next fiscal year FY 05 to
6.5 percent in FY 06. It is widely recognized that acceleration of the growth of GDP is
largely dependent on the flow of investment in the country. Attaining projected growth of
GDP as set in the MTMF would therefore require investment level to the tune of 26 percent
of GDP and this is based on the assumption that the Incremental Capital Value Addition Ratio
(ICVR) is around 4 percent in Bangladesh.
The importance of GDP, savings and investment is immense. It is noted that the growth of
GDP is largely dependent on capital intensity as well as on the efficiency in utilization of
capital. For this reason savings and investment as percent of GDP are the most important
indicators.

4.6 Actual Investment Statistics


Actual Foreign Direct Investment
The FDI Inflow Survey conducted by BOI found that during January-December 2003, total
FOI inflow in Bangladesh was US$ 441.4 million. It may be mentioned here that due to the
strategic policy change by the Board, the FOI target in 2003 was US $ 400 mil1ion. Table 8.6
presents the comparative statement of actual FDI inflow in Bangladesh.
Actual Local Investment

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Sample surveys of the BOI on registered local investment projects found that about that 85
percent of the registered local projects are either implemented or at the different stages of
implementation.
Private Investment Registration
Private investors initially register their investment proposals with Board of Investment
expressing their intent to invest in the respective proposals. After detailed feasibility studies
investment proposals are implemented in phases. As a result the actual investment projection
could be made possible on the basis of registration statistics.
Importance of FDI
The most Heavily Indebted Poor Countries and low income countries of the world remain
largely dependent on bilateral and multilateral aid for their development strategies. However,
since 1990 total Overseas Development Assistance (ODA) has dropped by more than half.
Much greater importance is now being placed on alternative sources of capital to finance
national development (ECOSOC 2000) and Foreign Direct Investment (FDI)1 is now the
largest source of foreign private capital reaching developing countries (Figure 1). Global
flows of FDI have grown phenomenally over the last ten years. Total inflows rose by nearly
four times, from US $174 billion in 1992 to US$ 644 billion in 1998. However, total flows to
developing economies fell between 1997 and 1998 (UNCTAD 1999). Regionally, prospects
look least good for developed countries. Of the middle to low income countries, Asia has
experienced the fastest rate of growth in FDI but also the greatest volatility.

4.7 How can FDI be better applied to Sustainable Development?


Accessibility and stability of FDI
If FDI is to take a greater role in building developing country economies, further assessment
of the factors which influence and are influenced by FDI flows is necessary. Foreign
companies are thought to be attracted to recipient countries for a whole range of factors, e.g.
political stability, market potential & accessibility, repatriation of profits, infrastructure, and
ease of currency conversion. Privatization and deregulation of markets are seen as central
means to attract FDI, however this can leave the poorest or most indebted countries open to
destabilizing market speculation (ECOSOC 2000). National legislation can support better

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investment security for local markets, fair competition and corporate responsibility through
defining equitable, secure, non-discriminatory, transparent investment practices.
Socially Responsible Investment
Ethical and socially responsible FDI can be encouraged through national, bilateral and
international investment guidelines and regulation e.g. consumer rights, information
provision, commercial probity, labor standards and corporate culture (UNCTAD 1999).
Several institutions have developed or are currently working on responsible practice. The
ILO has 180 conventions referring to social responsibility and it also has more specific
Tripartite Declaration of Principles (1977), concerning TNCs and social policy2. UNCTAD
has developed a Code of Restrictive Business Practices. Eradication of poverty and
reduction of gender inequality, where women make up nearly 70% of the worlds poorest,
should be prioritized.
Environmental protection
Greater efforts need to be made to assess the linkages between environmental impacts and
FDI, although it may be difficult to isolate FDI impacts from other activities. Authorities and
businesses can apply Environmental Management Systems (EMS) to assess the potential
impacts of FDI ventures, e.g. ISO 4001 which details techniques such as Life-CycleAnalysis, Environmental Impact Assessments (EIA) and Environmental Audits. These all
require investment in inspection, monitoring, regulation and enforcement to ensure effective
implementation. The resources required to effectively adopt these approaches are often
lacking in many developing countries, suggesting a vital need for targeted international
assistance (UNCTAD 1999). Greater environmental commitment can also bring long term
corporate gains e.g. greater efficiency and better quality of practice.

4.8 Legal Environment


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-

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discriminatory treatment between foreign and local investment, and repatriation of proceeds
from sales of shares and profit.
Government of Bangladesh is agreeably helping to provide proper legal facility for the
foreign investors. So in the question of legal environment and FDI prospect it can be told that
the legal environment is quite sound for the foreign investors.
Political Environment
Political Environment is very crucial for an economy to attract foreign investor or to increase
Foreign Direct Investment (FDI). Political situation of Bangladesh are not sound enough to
attract investor in a high speed. Political situation is important because the investors are not
feeling secure to invest in such country where the countrys political situations are unstable.
It is very harmful for such a developing economy like Bangladesh. If the government wants
to increase its FDI performances than political climate obviously have to be sound to attract
the investors from the different countries of the world.
Population
Population is another issue in the question of FDI. We have a huge number of population in a
ratio with our total lands. Huge population always indicates that the huge amount of demand
and which will make the foreign investors interested to invest such country.

4.9 Investment Facilities in Bangladesh


Bangladesh offers generous opportunities for investment under its liberalized Industrial
Policy and export-oriented, private sector-led growth strategy. All but four sectors

Arms and ammunition and other defense equipment and machinery.

Forest plantation and mechanized extraction within the bounds of reserved forests

Production of nuclear energy, and

Security printing and mining

are open for private investment in Bangladesh. The governments role is that of a facilitator
which helps create an enabling environment for expanding private investment, both domestic

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and foreign. The Board of Investment (BOI), established by the government for accelerating
private investment, provides institutional support services to intending investors.

4.9.1 General Facilities/ Incentives


Tax holiday
Tax holiday facilities will be available for 5 or 7 years depending on the location of the
industrial enterprise. For industrial enterprises located in Dhaka and Chittagong Divisions
(excluding Hill Tract districts of Chittagong Division) the tax holiday facility is for 5 years
while it is 7 years for locations in Khulna, Sylhet, Barisal, and Rajshahi, Divisions and the 3
Chittagong hill districts.
Tax holiday facilities are provided in accordance with existing laws. The period of tax
holiday will be calculated from the month of commencement of commercial production. Tax
holiday certificate will be issued by NBR (National Board of Revenue) for the total period
within 90 days of submission of application.
Tax exemption
Tax exemptions are allowed in the following cases

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


collaborator, firm, company and expert.

Exemption of income tax up to 3 years for foreign technicians employed in industries


specified in the relevant schedule of the income tax ordinance.

Tax exemption on income of the private sector power generation company for 15
years from the date of commercial production.

Tax exemption on capital gains from the transfer of shares of public limited
companies listed with a stock exchange.

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

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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.
Concessionary duty on imported capital machinery
Import duty, at the rate of 5% ad valorem, is payable on capital machinery and spares
imported for initial installation or BMR/BMRE of the existing industries. The value of spare
parts should not, however, exceed 10% of the total C & F value of the machinery. For 100%
export oriented industries, no import duty is charged in case of capital machinery and spares.
However, import duty @ 5% is secured in the form of bank guarantee or an indemnity bond
will be returned after installation of the machinery. Value added Tax (Vat) is not payable for
imported capital machinery and spares.
Foreign Investment
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.
Facilities / incentives
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.
A foreign technician employed in foreign companies will not be subjected to personal tax up
to 3 (three) years , and beyond that period his/ her personal income tax payment will be
governed by the existence or non-existence of agreement on avoidance of double taxation
with country of citizenship.

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Full repatriation of capital invested from foreign sources will be allowed. Similarly, profits
and dividend accruing to foreign investment may be transferred in full. If foreign investors
reinvest their repatriable dividends and or retained earnings, those will be treated as new
investment. Foreigners employed in Bangladesh are entitled to remit up to 50 percent of their
salary and will enjoy facilities for full repatriation of their savings and retirement benefits.
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.
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.
Other Incentives

Citizenship by investing a minimum of US $ 500,000 or by transferring US$


1,000,000 to any recognized financial institution (Non-repatriable).

Permanent residentship by investing a minimum of US$ 75,000 (non-repatriable)

Special facilities and venture capital support will be provided to export-oriented


industries under Thrust sectors. Thrust Sectors include Agro-based industries,
Artificial

flower-making,

Computer

software

and

information

technology,

Electronics, Frozen food, Floriculture, Gift items, Infrastructure, Jute goods,


Jewellery and diamond cutting and polishing, leather, Oil and gas, Sericulture and silk
industry, Stuffed toys, Textiles, Tourism.

4.10 Foreign and Local Borrowings


Foreign loans
Industrial enterprises in Bangladesh (local, foreign or joint venture) may borrow abroad with
prior Board of Investment (BOI) approval. Remittances towards payment of interest and
repayment of principal as per terms of BOI approved borrowing may be made through ADs
without prior Bangladesh Bank approval.

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Local borrowings
Banks in Bangladesh may extend working capital loans or term loans in local currency to
foreign-controlled or foreign-owned firms/companies (manufacturing or non-manufacturing)
operating in Bangladesh on the basis of normal banker-customer relationship, without
reference to Bangladesh Bank. Banks in Bangladesh are free to grant local currency loans to
joint venture industries in EPZ up to the amount of short term foreign currency loans
obtained from abroad.
Convertibility on Trade Account
Bangladesh Taka is fully convertible for settlements of trade related transactions. Import
license is not required for import of items not in the control list. An importer has automatic
access to foreign exchange for import of all items outside the control list, and also for import
of control list items as per general or specific authorization of the office of the Chief
Controller of Imports and Exports.

Exchange Facilities for Exporters


New Exporters
Annual foreign exchange quota for business travel abroad for new exporters has been set at
US $ 6000. Bonfire requirement beyond US $ 6000 is accommodated by Bangladesh Bank
upon written request submitted with supporting documentation.
Retention Quota for merchandise exporters
Merchandise exporters may retain up to 50% of realized FOB value of their exports in
foreign currency accounts in US$, Euro, Japanese Yen. For export items with high import
contents (such as naphtha, furnace oil, bitumen, readymade garments etc.), the retention
quota is 10%. The computer software and data entry/processing service exporters may also
retain up to 50% of realized export proceeds in foreign currency accounts. Funds from these
accounts may be used to meet bonafide business expenses, such as business visits abroad,
participation in export fairs and seminars, import of raw materials, machineries and spares
etc. Funds from these accounts may also be used to set up offices abroad without prior
permission of Bangladesh Bank. Exporters may, at their option, retain the foreign currency in

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interest bearing renewable term deposit accounts in Bangladesh with a minimum amount of
USD 2,000 or Pound Sterling 1,500 equivalent.

Retention quota for service exporters


Service exporters may retain 5% of their repatriated income in foreign currency accounts.
Funds may be drawn from these accounts to meet expenses for bonfire business expenses
abroad. This quota may also be kept in interest bearing renewable term deposit accounts.
However, foreign exchange earnings on account of indenting commission or agency
commission for export from Bangladesh may not be credited to such accounts since these
incomes originate from Bangladesh sources.
Declaration of Foreign Exchange on Form FMJ
Incoming passengers may bring in amount of foreign exchange with declaration on form
FMJ at the time of arrival. No declaration is necessary for amounts up to US$ 3,000. For
non-residents, the entire amount brought in with declaration, or up to US$ 3,000 brought in
without declaration may be freely taken out at the at the time of departure. Up to US$ 3,000
brought in without declaration may also be retained and taken out freely by a person
ordinarily resident in Bangladesh.

Foreign currency accounts


NFCD Accounts
Non-resident Foreign Currency Deposit (NFCD) accounts may now be maintained as long as
the account holders desire. Amounts brought in by non-resident Bangladeshis can be
deposited in foreign currency account any time after return to Bangladesh
F.C Accounts of non-resident Bangladeshis
Foreign currency accounts opened in Bangladesh in the names of Bangladesh nationals or
persons of Bangladesh origin working or self employed

abroad can now be maintained as

long as the account holders desire.


RFCD Accounts

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Persons ordinarily resident in Bangladesh may maintain foreign currency accounts with
foreign exchange brought in at the time of their return to Bangladesh from visits abroad.
These accounts are termed as Resident Foreign Currency Deposit (RFCD) accounts. The
amount brought in with declaration to customs authorities on form FMJ and up to US $ 5000
brought in without declaration may be credited to this account. However, proceeds of export
of goods or services from Bangladesh and commission earnings arising from business deals
in Bangladesh cannot be credited to such accounts. Balances of such accounts are freely
remittable abroad. Balances of RFCD accounts may also be used by the accounts holders for
their travel abroad in the usual manner. RFCD accounts may be opened in US Dollar, Euro,
Pound Sterling, Deutsche Mark or Japanese Yen and may be maintained as long as the
account holders desire. Interest may be paid on these deposits if these are for a term of not
less than one month and the balance is not less than US $ 1000 or Pound Sterling 500
equivalent.
F.C Accounts of other entities
ADs do not require prior permission of Bangladesh Bank for opening of foreign currency
accounts of:

Non-resident foreign persons/firms;

Diplomatic missions in Bangladesh and their expatriates;

Diplomatic bonded warehouses (duty free shops);

Local and joint venture contracting firms employed to execute projects financed
by foreign donors/international donor agencies;

Bangladesh nationals working in the international bodies in Bangladesh and


drawing pay and allowances in foreign currency.

Maintaining of bank accounts abroad


Bank accounts outside Bangladesh opened by Bangladesh nationals while working abroad
may now are maintained even after their return to Bangladesh.

Miscellaneous Remittances

Remittance of membership fees

Evaluation and Visa Processing Fee

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Visa fee

Family maintenance

Chapter-05
Financial System of FDI and PI

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5.1 Financial System of Bangladesh


The financial system of Bangladesh consists of Bangladesh Bank (BB) as the central bank, 4
nationalized commercial banks (NCB), 5 government owned specialized banks, 30 domestic
private banks, 10 foreign banks and 28 non-bank financial institutions. The financial system
also embraces insurance companies, stock exchanges and co-operative banks.
Central Bank and its policies
Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulate all
the banks. It performs the traditional central banking roles of note issuance and of being
banker to the government and banks. It formulates and implements monetary policy manages
foreign exchange reserves and supervises banks and non-bank financial institutions.

Interest Rate Policy

Capital Adequacy

Loan Classification and Provisioning

Foreign Exchange System

Exchange Rate Policy

Bank Licensing

Commercial Banks

Medium Term Macroeconomic Framework


To facilitate the implementation of the National Strategy for Economic Growth, Poverty
Reduction and Social Development, a Medium Term Macroeconomic Framework (MTMF)
has been specified. The framework has been worked out on the basis of the estimated values

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of FY 2002-03 as the benchmark. The purpose is to comprehend the dynamics of the
economy identifying key macroeconomic fundamentals and formulate and implement
realistic budget.

Economic Sectors
The following paragraphs are intended to present briefly tI1e results of progress detailed in
the important sectors of the economy.

Agriculture

Industry

Power and Energy

Transport and communication.

Poverty reduction

Human recourses development

Private sector Development

5.2 The FDI census in Bangladesh


The Bangladesh Board of Investment (BOI) conducted a census of foreign direct investors in
February 2003 to gather comprehensive primary data and actual FDI inflows based on
projects registered with BOI and the Bangladesh Export Processing Zones Authority.
ResultsFDI inflows in 2002 were $328 million (compared with $ 58 million on a balance of
payments basis reported by the Central Bank of Bangladesh). Half of it was financed by
equity, 31 % by reinvested earnings and 19% by intra-company loans. While FDI flows have
traditionally been concentrated in the power and energy industries, 44% of the total FDI
flows in 2002 went to the manufacturing sector. The major sources of investment in 2002
were Asia (45%), followed by Europe (32%) and North America (17%). Norway was the
single largest investor (19%), followed by the United States (17%), Singapore (14%) and

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Hong Kong (China) and Malaysia (9% each). Most of the FDI from Norway was in telecoms
and from the United States in the services sector (g.e. power generation, oil and gas, liquefied
petroleum gas bottling, medicare service). Investments from Asia, particularly South, East
and South-East Asia, were concentrated in manufacturing. The major investors include ASE
and Unocal (United States), BASF (Germany), Cemexs (Mexico), Holcim and Nestle
(Switzerland), Lafarge and Total FinaElf (France), Taiheyo (Japan), Telenor (Norway) and
TMI (Malaysia).
This is an example of how careful FDI statistics need to be interpreted, given the different
ways in which they are compiled. According to the commitments made in the Mid-term
Strategic Promotional Plan 2003-04 of BO1, the first half yearly FDI Inflow survey of 2003
was undertaken by BOI in cooperation with BEPZA. This report, the second of its kind,
presents the findings of the survey in detail.
FDI Inflow Survey Findings
During January-June 2003, a total of US$ 287 million of FDI received in Bangladesh which
is 71% higher than the corresponding period of last year.

Consumer Price Index and Inflation


Savings
Data on savings and investment are inadequate but available information indicates slowly
rising trend in domestic savings and investment expressed as a percentage of GDP. Domestic
savings as a percentage of GDP rose from 18.2 of FY03 to 18.3 in FY04.
Exchange Rate
The exchange rates of Taka for inter-bank and customer transactions are set by the dealer
banks themselves, based on demand-supply interaction. The Bangladesh Bank is not present
in the market on a day-to-day basis and undertakes purchase or sale transactions with the
dealer banks only as needed to maintain orderly market conditions.
Fiscal Year
1993-94
1994-95
1995-96
1996-97

Rate
40.00
40.20
40.84
45.46

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1996-97
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
Exchange Rate of Dollar ($)

42.70
48.06
50.31
53.96
57.43
57.90
58.94
59.68

Private Sector Development


In a market economy private sector is considered as the main driving force of envelopment.
The present government has therefore taken elaborate measures to expand the participation of
private sector in overall development activities. In addition, efforts have been continuing to
implement reforms and liberalization programs to strengthen the structure of the free market
economy as well as to develop an efficient and competitive private sector. Direct intervention
by the government in production related and commercial activities are increasingly becoming
limited. Government is now repositioning its role of a regulator to that of a facilitator and
partner. In order to make the private sector more transparent, robust, dynamic and modern,
Government is bringing in changes, modifications in the privatization policies. It is also
firmly committed to privatize the state owned enterprises (SOEs) transparently keeping in
view the welfare of the employees. Besides investment in the traditional sectors, initiatives
are also there to encourage private entrepreneurs in different service sectors like power, gas,
mineral resources, transportation and communication, education lli1d health. The initiatives
taken within the framework of various policies that have been formulated and implemented
to support this goal are having substantial positive impact on the overall development of the
country.
In recent time, the slowdown of the world economy coupled with political unrest in
international arena had its adverse impact on Bangladesh economy too. In spite of that, the
multifaceted measures of the government for stimulating investment, production and export
as well as for infusing dynamism in the stock market were successful to boost up the
economy and as a result, GDP is growing secularly. In this regard, private sector has made its
mark.

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Developing a Private Investment Friendly Environment

Industrial Policy Reform

Formation of the Privatization Commission

Role of the Board of Investment

Developing the Capital Market

Privatization Activities in Various Sectors of the Economy


Infrastructure

Oil and Gal

Power

Tele communication

Transport Sector

Air Transportation Sector

Tourism

Bangladesh Railway (BR)

Roads and Highways

Water Transport

Banking and Insurance

Education

Agriculture

5.3 Motivation
FDIs contribution to domestic investment and output growth dominates over the contributions
stemming from portfolio equity flows and international loans. The gains to the host country from
FDI are determined by the informational value of

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FDI: The hands-on-management style of direct investments enables foreign direct investors
to operate only in sectors with good economic growth prospects. This has also an indirect
effect because it spurs the domestic economy to invest in particular sectors, thereby leading
to economies of scale and positive spill-over effects to the rest of the economy. These latter
effects will be more or less pronounced depending on the nature of the investment
technology and of the degree of trade-openness of the recipient country. The informational
value of FDI poses also a problem of asymmetric information between buyers and sellers of
investment projects. As common knowledge about the direct investors informationadvantaged -on where, when and why to invest in particular sectors of the host country reduces the resale price that a direct investor may get when deciding to exit from the host
country. This higher exit cost, due to the difficulty of reselling a firm (i.e. asymmetric
information at the exit level), implies that only investors that have a low probability of
having to resell early will end up undertaking direct investments. Portfolio investors are then
by default only short-term investors, which is why empirically portfolio investments exhibit a
much larger volatility than direct investments.
A corollary of this result is that increased transparency - i.e. a more efficient institutional
framework, warranting, among other things, higher capital markets and corporate governance
transparency - in the host country could lead to a higher direct investment share by mitigating
the informational asymmetry inherent in the nature of direct investments. In a more
transparent environment a buyer could distinguish whether the seller of an investment project
is motivated by, say, personal liquidity needs or by bad information about the expected
profitability of an investment project. This would lead to higher resale prices, larger fractions
of direct investments relative to portfolio investments and a lower (positive) volatility
differential between portfolio and direct investments.
Developed countries exhibit lower volatility differentials between PI and FDI relative to
developing countries. The authors find that herding among funds (i.e. among portfolio

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investors) tends to be more prevalent in less transparent countries.
In a noisy economic environment with various assumptions about the degree of (capital
markets and corporate governance) transparency, any equilibrium outcome (i.e. a pooling
equilibrium, or a separating equilibrium) is possible depending on the exogenous probability
faced by a foreign investor of being hit by a liquidity shock that forces her to resell the
investment project ahead of time and by the presence of setup costs for undertaking a certain
investment project (a proxy for uncertainty at the entry level). Informational asymmetries
between buyers and sellers may be stronger (weaker) depending on a particular scenario
faced by investors.
This paper explicitly accounts for varying degrees of transparency due to some noise
incurred by investors when observing some fundamental variables (such as institutional
efficiency, capital and corporate governance transparency, and also the financial liquidity
conditions of other foreign investors. We show how the (imperfect) degree of transparency
can help to pin down an equilibrium outcome in the presence of noise that leads to
informational asymmetries between foreign investors. In our framework noise leads to higher
order beliefs that are exploited by rational agents to select an optimal (i.e. noise-contingent)
equilibrium strategy.
The contributions of our work can be summarized as follows: First, we formalize the results
in the recent (theoretical and empirical) contributions to the investment literature by using the
global games framework as a tool for explicitly allowing for heterogeneity among foreign
investors. This allows us to endogenize the relevance of asymmetric information in
determining the relative shares of direct relative to portfolio investments in the recipient
country. In particular, we think of our paper as a complementary contribution to the literature
discussed above, that explicitly accounts for the role of informational asymmetries in
deterring types of investment flows. Second, our results have a clear and intuitive normative
implication. Lower noise (higher transparency) leads to more direct investments relative to
portfolio investments and lower volatility differentials between the two types of investment.

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Third, while this work focuses only on a static game between investors, it suggests that in a
(repeated) dynamic setup a country might move through investment cycles characterized by
different degrees of the various types of investment forms.

5.4 Bangladesh Status:


From the inception of the independence Bangladesh has been in the center of economic
investment incentive for many countries and institutional bodies of the world. With the
passage of time Bangladesh reform its regulatory structure in regard to the FDI to open up
the new avenue and to dislodge the compliances related to the FDI. But the effort of this
structural progress has back warded by sudden and unexpected political influence and
changes. The situation becomes worse one in the September attack on US. During this period
flow of FDI all over the world shrunken at a greater extend. Bangladesh had also severely
affected by that unwanted changes in the world scenario. Before going for in depth analysis
the status of Bangladesh from different aspects are discussed. Bangladesh could be an
attractive place of FDI. It is located between the growing markets of south Asia.

Economic Status: The macroeconomic situation of the country is by large, stable,


characterized by a manageable fiscal deficit and low current account deficit. In external
trade, it has steady export growth. Foreign Exchange reserve is not bad.

Political Status: Bangladesh is a developing country having a republic type democratic


government. It has British style parliamentary system. After liberation in 1971 the then
government nationalized all the key industries. As a result, aid from western world remains
as the means of survival. But development of Bangladesh through aid seems to have failed.
We see hat Bangladesh is still poverty-ridden. As the effectiveness of aid declined very much
demand arose about market access to the developed countries of the product & services of
developing countries. But the market access of developed countries is faced with several

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problems of which politics seems to be prominent. A free trade policy otherwise called
globalization is seen as a lively remedy to solve both the problems of developed and
developing countries.

Investment Status: The present democratic government concentrates on more local &
foreign investments in oil, gas, cement, infrastructure, textile sectors of Bangladesh to face
the challenges of the twenty first century. Though prospects are there in Bangladesh, due to
insufficiency of capital & technology greater investment is no taking place. However the
recent trends o administrative, banking and infrastructure reform process, low rate of
inflation compared to the neighboring countries( in Pakistan 11.2%, in India 8.5%, Srilanka
16.7 % and Bangladesh 5%) and separate export processing zones are some of the indicators
of the countries development process. That may help in attracting local and foreign investors
from developed countries.
Besides, the most important tasks is to revive the rural economy so that the migration of rural
people will come down, because a country like Bangladesh has poor resources to meet the
bargaining demand of the citizens already settled in the urban areas.

5.5

Investment Registration Statistics in Bangladesh:

Before going for full-length analysis of the FDI flow in recent period I have a short look on
the industrial investment status. The industrial investment mainly consists of private versus
public, and local versus foreign investment. The analysis of industrial investment status will
provide us good information as to how we are using the FDI. The economy of Bangladesh
has been gradually drawing the attention of private sector investors since its opening up in
early 90s. Manufacturing is becoming increasingly vibrant claiming a significant share in
the total investment.

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Chapter-06
Recommendation
&
Conclusion
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6.1 Recommendation:
Overcoming the barriers
One can now look for the ways to overcoming the barriers to FDI and PI as we have
mentioned above. Here, we would recommend following measures that the authorities
concerned might consider:
6.1.1

Ensuring good governance

Good governance denotes a desirable state of affairs and so is the key to success of all the
reforms. Political and bureaucratic accountability are the two principal components of good
governance, and without ensuring them, good governance is not possible. Securing progress
on this front is the highest priority as continued difficulties pose a serious threat to the
sustainability of even the development achieved already. Establishing the rule of law is in
fact a pre-requisite to ensuring good governance.
6.1.2 Accountability and transparency
Accountability and transparency continue to remain the twin elusive prerequisites for the
overall development of the country. Private sector investment and FDI inflow are severely
hindered by the administrative barriers that arise out of a lack of transparency and
accountability, which logically leads to inefficiency and corruption. Competence and
efficiency, which are both appallingly, lacking in the bureaucracy, will both become
achievable goals with the infusion of transparency in decision-making and governance. This
will also greatly reduce what is commonly known as red-tapism or bureaucratic

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wrangling since the tiers of the decision making process are bound to become fluent and
responsible if they are held accountable for their work.
6.1.3

Co-ordination among state agencies

Without reducing the utter lack of co-ordination among the state agencies, the services and
functionaries cannot be efficient. Assuring proper co-ordination among ministries,
departments, regulatory bodies, and faster decision-making in the implementation process
will enhance the flow of investment.

6.1.4

Strengthening the regulatory authority

Government agencies responsible for facilitating investment need to be more active. In this
regard, full autonomy to the agencies like the central bank, investment promotion agencies,
telecom regulatory authority, energy regulatory authority, Securities and Exchange
Commissions etc., is a prerequisite.
6.1.5

Rightsizing the government

The size of the state organs is quite large and thus mostly inefficient, unproductive and
hazardous. So, rightsizing the government is important. By reducing the number of officials
in the decision making process in various state organs, transparency and accountability of
bureaucracy can be established. Offering a reasonable compensation package to the officials
retained is also one of the key factors in ensuring transparency and accountability.
6.1.6

Judicial and legal reforms

A sound judicial system, which is a must for good governance, is possible when the judiciary
can exercise its authority independently. In this regard, separation of the judiciary from
executive branch of the government is essential as influence of the executive on the lower
judiciary continues to be exercised. There is need for capacity building in the judicial system
in order to ensure speedy disposal of cases. Archaic laws, especially those related with trade
and investment should be updated in line with the needs of the day.
6.1.7 Tackling corruption

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Tackling corruption in banking, power, other state-owned enterprises and tax administration
ought to be an urgent priority. A comprehensive resolution of the corruption problem in
banking, power and other state-owned enterprises will require privatization along with
independent regulatory bodies functioning in the public sector.
6.1.8

Fiscal reform

Regarding tax administration, reform option includes establishing an autonomous tax


institution with proper incentive and accountability. Countries of the region can learn from
the international experience of a number of countries including the Internal Revenue Service
of the USA. There is, however, a need for further deregulation of authority. It is also
necessary to establish a coordinating mechanism to take decisive and continuous steps in
resolving problems identified in relation to project implementation.
6.1.9

Infrastructure reform

The main policy challenge is to redefine the role of public sector in infrastructure
development by gradually allowing the private sector to play a bigger role. Public sectors
role should be restricted to regulatory functions only. Mention may be made here that,
Bangladeshs existing Industrial Policy includes infrastructure as a thrust sector
acknowledging a lead role of the private sector supported by special incentives and the
Finance Minister of Bangladesh, in his 2002 budget speech, stressed the need for more
private sector participation in infrastructure development of the country. The Infrastructure
Investment Facilitation Center (IIFC) of Bangladesh has been interacting with the private
sector to attract private investment in this sector. Other countries of the region could take
lesson from Bangladesh in this regard.

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Conclusion
In conclusion, it could be said that experiences referred to as above are based on the same
encountered in Bangladesh. But, these are more or less the same in other countries of the
region. If the respective governments do not take appropriate measures, it would be difficult
to attract the expected level of FDI and PI.
The policy regarding the foreign direct investment should be clear and flexible and should
contain some lucrative options for foreign investors. This will certainly boast up the health of
FDI and PI in our country.
Our country is very much underdeveloped. In the context of an underdeveloped country the
role of FDI and PI is very vital and essential. We do not have sufficient internal resources to
meet up the growing demand of increasing population at different aspect. As a result we have
to rely greatly on FDI and PI to accelerate our economic growth and to meet up the demand.
Another point is credible and must have to note is the necessity of common census of foreign
direct investment. Only few months back the BOI and BB have provided contradictory result
regarding the FDI and PI in our country. But there should not be any discrepancy in regard to
this. This figure represents the condition of the country and should be accurate in nature.

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References
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http://www.jetro.go.jp/bangladesh.html
http://www.ficci.org.bd/bangladesh_country_profile1.html
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Bangladesh Economic Review-2003-05
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