An Interesting Topic

(Foreign Direct Investment)

Example: Telenor Group invest in Bangladesh as
Grameenphone Ltd and started its operations on March
1997.
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Bangladeshi Labor migrant
USD 9774.09 Million 67% of all labor
work in one of the
(2015-2016) Gulf Cooperation
Council (GCC).
countries: Bahrain,
More Representin Kuwait, Oman,
than 7 g 12% of Qatar, Saudi Arabia
million the GDP of or UAE (ILO).
Nationals the year
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Economies of scale are the cost advantages that
enterprises obtain, by decreasing cost per unit of
output with increasing scale as fixed costs are spread
out over more units of output.
Example: The printer quotes a price of $5,000 for 500 books,
and $10,000 for 2,500 copies. While 500 books will cost you $10
per book, 2,500 will only cost you $4 per book.
Example: Experience Clothing Company Ltd. Of
UK invests in Bangladesh garments sector for
cheaper labor cost of production.

Knitting & other Textile producer of Italy A-One

(BD) Ltd. invests in Bangladesh Textile industries
for lower production cost.
3

Marico Ltd. started its operation in Bangladesh

as Marico Bangladesh Ltd. in 2000 to produce
different types of oil using the cheaper raw
materials (coconut).
Maruti-Suzuki “A Japanese company” started its
operation in India in 1981 in that contract that the
Japanese owner control the business for a certain
period and then it sold its substantial portion of share
to the Indian owner as a result the Indian owner would
get the control. In 2007, the Indian owner got the
whole ownership of Suzuki company.
For Example: Wal-Mart has not only diversified
internationally but has spread its business into
many emerging markets as well. Because foreign
expansion diversifies Wal-Mart's sources of
revenue and thus reduces its reliance on the
U.S. economy
Between 1997-1998, A currency devaluation
occurred in Thailand and the Baht per dollar was
jumped 28 to 48. American businessman take
advantages from this opportunity and they bought
land and establish plant
there. When the Baht came
into the flexible situation
then the American Business
men commenced their
operation.
 Various inputs-including natural resources
 Technologies,
 Skilled personnel,
 Physical infrastructures and materials

 Market size and per capita income

 Size of GNP and projected rate of growth
 Access to regional and global markets
 Country specific customer preferences
 Structure of the markets
AN MNC can be motivated to FDI by analysing the
geographic factors including-
 The proximity of size to export markets
 Availability of local raw materials
 Availability of power, water and gas.

 Form and stability of Government

 attitude toward private and foreign investment by
Government
 customers and competition
 Degree of anti-foreign discrimination
 MNC companies always try to invest those
countries where tax advantages are available
 Tax rate trends
 Joint tax treaties with home country and others
 Availability of tariff protections
Foreign Direct Investments open a wide spectrum of
opportunities in the trading of goods and services both in terms of
import and export production.

 Integration into global economy

 Raising the Level of Investment
 Trade

Example: South Korea's Samsung Electronics Co Ltd has applied

for a license to invest $3 billion in building a second smartphone
factory in northern Vietnam. This project will gear the wheel of
economy in Vietnam both in terms of export and import of
production.
 Technology diffusion and knowledge transfer:
Developing countries by inviting FDI can introduce world-class
technology and technical expertise and processes to their
existing working process.
For example: In February 2011, Bangladesh reached an
agreement with Russia to build the 2,000 megawatt (MW)
Ruppur Nuclear Power Plant with two reactors, each of which
will generate 1,200 MW of power to meet electricity shortages.
 Increased competition
Overall development of a country is not possible without
creating employment for unemployed citizens. In this regard FDI
is working as a great helping hand of that particular host
country’s which cordially invites FDI.
Despite having lot of contributions in the economic
growth of a country, FDI is not free from limitations.
The Barriers of FDI are..
 Fall in domestic savings
 Less corporate tax
 Dualistic socio-economic structure
 Control over Political Decision
•
•
Independent variables:
Market Attractivness
Trade Openness
Environment Risk
Energy Price

Dependable Variable:
FDI
Market attractiveness, openness to trade and
energy prices have a significant and positive
association with FDI flows
High FDI flows are associated with low levels of
institutional risk, as measured by a country‘s
ratings for Bureaucracy Quality, Democratic
Accountability and Law and Order.
High levels of several Economic and Financial
risks are associated with high FDI flows like
Budget and Trade Balance
Countries that earn large reserves of foreign
currency from oil and gas revenues have found it
not desirable to open up their markets to foreign
investors

Countries that earn large reserves of foreign

currency from oil and gas revenues have found it
not desirable to open up their markets to foreign
investors
For Example: Generally high level of restrictions to
foreign ownership in OPEC countries compared to
non-OPEC
fdi = α0 + α1gro + α2inf + α3 logcost + α4 logtel + α5
op + α6 risk + α7 tax + ε

fdi = FDI net inflows as a percentage of Gross Domestic Product

(GDP)
inf = the rate of inflation measured by annual percentage change
of consumer prices
Gro = growth rate of per capita GDP
Logtel = telephone main lines per 1,000 people
Logcost = labour cost per worker
Op = the degree of openness
FDI inflows are positively associated with a
country‘s GDP per capita.

FDI inflows are positively associated with a

country‘s manufacturing exports

FDI inflows in are negatively associated with a

country‘s level of environmental risk
Political risk
Economic risk
Financial risk
Hymer (1976) explained the theories of FDI by
comparing the difference between foreign direct
investment and portfolio investment

 Hymer also analyzed that there are two reasons

why investors seek control

1. To make sure their investment is safe

2. To eliminate competition in foreign countries and
other countries.
Hymer stated that multinational companies are
motivated to invest in foreign countries due to
certain advantages .

For example: Getting factors of production at a

lower cost

Where market imperfection exists multinational

companies prefer to engage in direct investments
Raymond Vernon (1966) product life cycle theory has
analyzed four production stages beginning with invention
of new product.

Vernon tried to understand the shift of

international trade and international
investment.
• Stage 1- The enterprises are more focused on the
domestic market

• Stage 2- When the product matures, enterprises start

exporting to developed countries.

• Stage 3- When the product is standardized, the

enterprises would think less developed countries could
be good production place

• Stage 4- The home countries will be an importer since

the production decreases
The Uppsala model is a theory that explains how firms
gradually intensify their activities in foreign markets

• Step i- gain experience from the domestic market before

they move to foreign markets

• Step ii- start their foreign operations from culturally and/or

geographically close countries and move gradually to
culturally and geographically more distant countries

• Step iii start their foreign operations by using traditional

exports and gradually move to using more intensive and
demanding operation modes
 300 273.55
,237.92
FDI Inflows (Net) (In million US$)

250 224.21

200
135.21
150 131.1
120.3
107.01 93.12
100 97.32 82.42 77.54 69.56
55.25 49.45
50 40.32

Country
 FDI:
BANGLADESH
PERSPECTIVE
Rapidly developing market-based
economy
According to IMF,
Bangladesh ranked as the
44th largest economy in the Exports of textiles
world in 2011. and garments are
the largest source of
But still it’s a developing foreign exchange
countries with the
numerous potential of earnings
foreign investment
GDP total: $223.941b(2015-2016)

GDP per capita: Foreign

GDP growth rate
$1466 reserves:
$27 (%): 7.1%
Currency: (2015-16 est.)
(nominal: 2015-16) BDT (1 BDT=
billion(2016)
$0.0128205)
(avg 2009-10
Total Total
imports: Total
exports: FDI:$1833m
$33.50b $40.69b
(2015-16) (2015-16) (2015)
 Gross inflow Disinvestment Net inflow
800
726.23
700 644.14
596.46 606.92
FDI Inflows (in Million US$)

600 557.95
489.94
500
395.91
400 341.1
300

200 255.36 248.23

100 119.31
68.01
0
Jul-Sep 2014 Apr-Jun 2015 Jan-Mar 2015 Apr-Jun 2015
period
 USD
2524.78m USD
690.91m

USD
1833.87m

Gross Inflow Disinvestment Net Inflow

 1833.87
1900
1730.63
FDI Inflows (Net) (In million US$)

1700
1480.34
1500

1300 1194.88

1100
913.02
900 779.04
700

500
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
Period
Equity Capital Reinvested earnings Intra-company Loans

595.65, 54%

357.8, 33%
143.41, 13%
 1200 1096.86

1000
877.52
FDI Inflows (Net) (in million US$)

814.27
800 737.01
666.07
552.06 592.81
600 521.94

400 262.21 219.34

144.13 144.2
200

0
Jul-Dec 2013 Jan-Jun 2014 Jul-Dec 2014 Jan-Jun 2015
Total Non-EPZ EPZ
 330.81, 18% 389.58, 21%

36.79, 2%
83.36, 5%

197.22, 11%
199.54, 11%

80.44, 4%
38.7, 2% 29.22, 2%
96.59, 5%
351.62, 19%

Banking Telecommunication Power

Agriculture & Fishing Textiles & Wearing Food
Fertilizer Gas & Petroleum Trading
Leather & Leather Products Others
 Strategic Bangladesh’s
Youth &
Location of Export
Ambition
Bangladesh Competitiveness

Competitive Cost Fiscal & Non-

Base Fiscal Incentives
 China and India between them have vast and
increasingly prosperous populations, which
are projected to grow to three billion by 2050.
Bangladesh is well situated in every sense to
take advantage of this opportunity.

With improving education, technology and

economic growth, Bangladesh’s own market of
146.6 m people is becoming increasingly attractive
to business and foreign investors.
 Unlike older industrialized
societies with growing legions
of ageing dependents,
Bangladesh has a very youthful
demographic.
The country is young too, 40
years old.
66% of the population are
economically active (15 years
and over).
English Widely Spoken - The
national language is Bengali or
‘Bangla’. Yet our second
language, English, is widely
spoken, understood and
written.
 Manufacturing output has
seen steady growth, recently
in double figures. Bangladesh
provides significant benefits
to exporters.
Bangladesh offers a most liberal
FDI regime in South Asia, with
no prior approval requirements
or limits on equity participation
and repatriation of profits and
income in most sectors.

Bangladesh enjoys tariff-free access to the EU, Canada, Australia and

Japan. Bangladesh is the top manufactured products exporter to the
least developed countries as well as to Europe, with more than 50%
market share
 BD has lots of well-
Dhaka's skilled labor
educated, skilled and
cost base is still less than
energetic workers. And
the wages and salaries the other major cities.
are low

Dhaka's management Industrial estate rent in

grades are 2-3 times less Dhaka is cost effective
than in Singapore, than Shanghai, Jakarta,
Shanghai, Bangkok. Bangkok
 Automation of
Automation of
investor
export permit
registration
issuance at DEPZ
processes at BOI

Automation of Cash subsidy claim

Company process
Registration with simplification of
RJSC&F Bangladesh Bank
 BOI introduced
automated
Entire registration No need to visit BOI
registration system
process can be office or an
for both local &
completed online intermediary
foreign investors in
2010.

18% of industrial
Avg time to register
Cost to register fell projects are now
fell from 42 days to
by 82% being registered
12 days!
within 10 days only!
 BEPZA issued
automated export Average time to issue
permit issuance an export permit has
process at the DEPZ in reduced by 33 percent!
June 2010.

No of interfaces between companies and DEPZ

authority has reduced to 0 from 4!
 Introduced automated The number of visits to
The entire registration
business registration in RJSC&F has reduced
process is now online.
March 2009. by 40%

26% reduction in time 98% reduction in time

required for required to obtain
registration (23 days in name clearance (9 days
2009 to 17 days in in 2009 to 1.58 hours in
2012) 2012)
 Complicated
Political Unrest Corruption
Bureaucracy

Inconsistency in
Insufficient
High Inefficiency Policy
Power Supply
Implementation
 Improvement
Control of Red
of Law and
Tape
Order

Infrastructural Efficiency in
Development Port services
• Citi Investment Research & Analysis
stated that Bangladesh, alongside
China, Egypt, India, Indonesia, Iraq,
Mongolia, Nigeria, Philippines, Sri
Lanka and Vietnam, is having the
most promising (per capita) growth
prospects.

Goldman Sachs branded Bangladesh

in its 'Next 11' list after the BRIC
nations.
JPMorgan Chase commented
that Bangladesh ranks fourth
in growth of economically
active population.

A 2012 HSBC report titled The

World in 2050, listed
Bangladesh as one of the top 7
countries expected to deliver
the fastest growth en route to
2050.
• Morgan Stanley announced that Bangladesh
is at the very early stages of an investment
boom.
1. International Financial Management by Jeff Madura -
Florida Atlantic University, 9th edition.
2. International Business By Oded Shenkar, Yadong Luo,
Tailan Chi
3. Foreign Direct Investment by edited by Kenneth A.
Froot.
4. Foreign Direct Investment by Harrison G. Blaine.
5. Foreign Direct Investment in Developing Countries: A
Theoretical Evaluation By Sarbajit Chaudhuri, Ujjaini
Mukhopadhyay
1. FDI Survey Report January-June, 2015 By Statistics
Department Bangladesh Bank.
2. World Investment Report-2015 by United Nations
Conference on Trade and Development(UNCTAD)
3. www.investopedia.com/Foreign Direct Investment -
FDI
4. en.wikipedia.org/wiki/Foreign_direct_investment
5. “A study of foreign direct investment and economic
growth in bangladesh” by Md. mamun howlader
6. “Foreign direct investment in bangladesh, prospects
and challenges and its impact on economy” by
Afsana Rahman.
7. “Impact of Foreign Direct Investment on
Bangladesh’s Balance of Payments: Some Policy
Implications” by Muhammad Amir Hossain.
8.”Foreign Direct Investment Theories: An Overview of
the Main FDI Theories” by Vintila Denisia
9. Theories of international trade, foreign direct
investment and firm internationalization: a critique by
Robert E. Morgan and Constantine S. Katsikeas
1. What is FDI? What are the primary objectives of Foreign
direct investment?
2. What are the revenue related objectives and cost related
objectives of FDI? Give proper example with reference.
3. What are the others motives that is related to FDI?
4. Why FDI is important in the developing country like
Bangladesh? Are there any disadvantage? Explain?
5. What are the major types of FDI and how FDI can be
achieved ? Give proper Example.
6. How FDI can be determined and what are the factors that
influence the factors of FDI? How can we calculate FDI?
7. What are the theories of FDI? Explain Hymer FDI Theory ?
8. What is the condition of world FDI and what are the major
sources that influence FDI?
9. What is the present economic condition of Bangladesh? How
FDI develop the overall economy of Bangladesh?

10. Why foreign investor should invest in Bangladesh and what

factors influence the investment decision of foreign Investors?

11. What are the limitation of FDI, Explain? Do you have any
recommendation to attract foreign investors?
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