An Assignment

On
FDI in Bangladesh

For Partial Fulfilment of International Business,

Bachelor of Business Administration (BBA),
Department of Business Administration

Manarat International University (MIU)

Submitted To:

Md. Kamrujjaman
Assistant Professor of Management
Department of Business Administration
Manarat International University
Gulshan, Dhaka-1212

Submitted By:

Name: Rubaba Karim

ID: 2056BBA04244
Department of Business Administration
Manarat International University
Gulshan, Dhaka-1212
Date of Submission: 25 June, 2022
he issue of Foreign Direct Investment
(FDI) has been receiving phenomenal
attention from many
governments. Bangladesh is not
lagging behind from it. Economic
development for the developing
countries like Bangladesh is largely
dependent on FDI.
he issue of Foreign Direct Investment
(FDI) has been receiving phenomenal
attention from many
governments. Bangladesh is not
lagging behind from it. Economic
development for the developing
countries like Bangladesh is largely
dependent on FDI.
he issue of Foreign Direct Investment
(FDI) has been receiving phenomenal
attention from many
governments. Bangladesh is not
lagging behind from it. Economic
development for the developing
countries like Bangladesh is largely
dependent on FDI.
he issue of Foreign Direct Investment
(FDI) has been receiving phenomenal
attention from many
governments. Bangladesh is not
lagging behind from it. Economic
development for the developing
countries like Bangladesh is largely
dependent on FDI.
Foreign direct investment (FDI) is a key element in international economic integration.
FDI creates direct, stable and long-lasting links between economies. It encourages the
transfer of technology and know-how between countries, and allows the host economy
to promote its products more widely in international markets. FDI is also an additional
source of funding for investment and, under the right policy environment, it can be an
important vehicle for development.
Foreign direct investment (FDI) is a potent weapon of economic development,
especially in the current global context. The issue of Foreign direct investment (FDI) has
been receiving phenomenal attention from many governments. Bangladesh is not
logging behind from it. Economic development for the developing countries like
Bangladesh id largely dependent on FDI.

Introduction: When one company invests in the other countries directly then it is known
as foreign direct investment. It may occur by taking an existing company in the foreign
country or by forming a new company. There is so much foreign direct investment in our
country. Foreign Direct investment is defined as an investment, involving a long-term
relationship and reflecting a lasting and control by a resident entity in one economy
(foreign direct investor or parent enterprise), in an enterprise resident in one economy
other than that of the foreign direct investor enterprise or affiliate enterprise or foreign
affiliate. Proponents of Foreign Direct Investment argue that it brings prosperity to the
recipient countries through technological transfer, increasing volume of exports,
enhancing job opportunities and increasing government revenue.

Foreign Direct Investment (FDI) increases the volume of domestic capital to finance new
development projects in the country and simultaneously provides access to new
technology, managerial and marketing know-how. But the inflows of FDI are not
praiseworthy though it has an increasing trend. To overcome the deficiency in the
domestic financial capacity, Bangladesh adopted the Foreign Private Investment Act in
1980 to encourage FDI. This Act provided protection to foreign investors against
expropriation and further ensured full repatriation of profits and capital. In addition, it
ensured equal treatment for local and foreign investors, and allowed 5-7 years of
corporation tax holiday to foreign industries. The intention behind FDI liberalization was
to encourage economic growth, increase employment, and create a new source for
much needed capital.

FUNCTIONAL RELATIONSHIP BETWEEN FDI AND ECONOMIC GROWTH

VARIABLES:
The impact of FDI on economic growth is augmented by knowledge transfers to and
through the firms involved (Hermes and Lensink, 2003), fostering productivity
improvement or the spillover effects. The effects of FDI on economic growth are both
direct and indirect. Concurrently, FDI can itself be influenced by economic growth.
Hence, the prospect of a two-way relationship must be incorporated into the analysis for
the linkages to be studied correctly and to obtain unbiased results.
In addition, economists contend that trade openness affects economic growth
significantly. Openness contributes to economic growth through various channels, such
as promoting a more efficient allocation of resources, greater competition in product
markets and diffusing knowledge and technological advancements across countries.
The converse may also be true: economic growth can affect trade openness by
influencing policy determinations bearing on trade openness, a political-economy
linkage.
Our methods and data enable the study of interconnections of both FDI and trade policy
with economic growth. They are founded on the explicit premise that these relationships
can be two-way and are not simply unidirectional.
Existing studies tend to focus on four specific, partial hypotheses that may be described
as

growth-led FDI
2 FDI-led growth
3 openness-led growth
4 growth-led openne
growth-led FDI
2 FDI-led growth
3 openness-led growth
4 growth-led openne
 Growth-led FDI,
 FDI-led growth,
 Openness-led growth,
 Growth-led openness.

FDI Inflows to Bangladesh: After the two consecutive years of decline in the inflows of
foreign direct investment (FDI) in Bangladesh, the recovery is likely to take more time.
Inflow of FDI in Bangladesh dropped by around 11.0 per cent in 2020 to US$2.56 billion
from $2.87 billion in 2019. The net inflow of FDI in 2018 was $3.61 billion which was
the highest amount of inflow in a single year in the country. The report also mentioned
that global FDI declined by 35 per cent to $998.91 billion in the last year from $1530.28
billion (or $1.53 trillion) in 2019 due to pandemic. It, however, expressed optimism that
FDI flows are expected to bottom out in 2021 and recover some lost ground with an
increase of 10 to 15 per cent in the current year.
“In Bangladesh and Sri Lanka, FDI inflows will take longer to recover, as investment
commitments in these countries remained weak,” said the UNCTAD report. In this
connection, it mentioned that announced Greenfield investment projects in 2020, an
indication of FDI trends over the next few years, contracted 87 per cent in Bangladesh
and 96 per cent in Sri Lanka. “This contraction is due to weak investment interests in
garment production, a major export industry and FDI recipient in these countries,” it
added. “Investment in, and production of, garments suffered severely in 2020, with no
sign of recovery as of early 2021.”
The report also mentioned that garment factories in Bangladesh faced some $3 billion
worth of cancelled export orders in the last year while in Sri Lanka, export data for
January 2021 showed no recovery yet. Bangladesh was the second largest recipient of
FDI in the last year among the Least Developed Countries (LDCs), preceded by
Cambodia where inflow of FDI stood at $3.60 billion in 2020. Ethiopia became the third
with $2.40 billion and followed by Mozambique ($2.30 billion) and Myanmar ($1.80
billion). All the five LDCs faced decline in FDI in the last year.
Gross foreign direct investment (FDI) inflow in Bangladesh increased by only 3.66 percent
to $1.9 billion in the first half of the current fiscal year till December 2021, Bangladesh
Bank data shows. Of which, net FDI flows were $870 million, up 4.57 percent compared to
the inflows for the same period a year ago.

Outflows of FDI in Bangladesh:

Net outflow of foreign direct investment (FDI) from Bangladesh declined further in 2020,
according to World Investment Report (WIR) 2021.
Released by the United Nations Conference on Trade and Development (UNCTAD), the
report showed that net outward FDI declined to US$12 million in the last year which was
$28 million in 2019. The outward FDI reached at $142 million in 2017 which was the
highest ever.

According to UNCTAD, FDI inflows comprise capital provided by a foreign direct

investor to a foreign affiliate, or capital received by a foreign direct investor from a
foreign affiliate. FDI outflows represent the same flows from the perspective of the other
economy. WIR 2021 also showed that in 2020, multinational entities (MNEs) from
developed economies reduced their investment abroad by 56 per cent, to $347 billion.
As a result, their share in global outward FDI dropped to a record low of 47 per cent.

Global outflows of FDI came down to $739.87 billion in the last year from $1220 billion
($1.22 trillion) in 2019, according to the report. It showed that inflows of global FDI stood
at $998.91 billion in the last year from $1530.28 billion (or $1.53 trillion) in 2019.
Factors affecting FDI climate in Bangladesh: To me, good and productive
physical infrastructure is a key factor which influences FDI inflow. Apart from this,
there are some other factors that can affect FDI climate in Bangladesh.

 Macroeconomic Environment: Macroeconomic factors include issues such as

fiscal, monetary, and exchange rate policies and political stability. The overall
economic condition and business climate as well as various specific economic
factors have a serious bearing for FDI. Foreign investors choose a location
where there is evidence of success and availability of favorable macro-
economic conditions. Bangladesh started its journey towards development
immediately after independence and formulated six consecutive plans
emphasizing growth of income and employment, poverty alleviation programs
and business development.

 Governance: Governance relates to government interactions with business,

which typically mean regulation and corruption, both of which affect the costs of
starting and running a business. Bangladesh scores relatively well on the indexes
for voice and accountability, regulatory quality, and government
effectiveness, exceeding the average for low-income countries on all three
measures (in an index measure named government hexagon). In addition, it
performs better than China, India, and Pakistan on regulatory quality but worse
than all three on government effectiveness, control of corruption, political stability
and rule of law and also worse than the average for low income countries.

 Infrastructure: Infrastructure refers to the quantity of physical infrastructure

(such as power, transport, and telecommunications). The better the infrastructure
of the host economy, the more attractive it is to foreign investors. The
quality of infrastructure appears to be relatively poor in Bangladesh. In a
survey of business executives from 75 countries, the quality of
infrastructure in Bangladesh was rated as being “poorly developed and
inefficient‟‟. Of all countries in the world, Bangladesh was ranked as 74th.

 International Integration: International integration is another determinant

associated with investment. Countries that aggressively pursued integration
with the global economy (such as Brazil, China, India, Malaysia) grew more
quickly in the 1990s than those that did not. The low level of FDI incoming in
Bangladesh indicates poor integration with the global economy. Other evidence
of poor integration with the global economy is the low level of FDI inflows and per
capita remittance receipts.
 Political Stability: Political instability of a host country changes the „rules of
the game‟ under which businesses operate that has an impact on profit and
future FDI inflows. Political factors like change of government, attitude of
opposition group, transparency in bureaucracy, degree of nationalism,
corruption, and terrorism and so on, are seriously considered by the investors in
pre-investment decision making. In Bangladesh, there is no broad national
consensus on some of the major political issues.

 Human Resources: Bangladesh is one of the poorest country in the world

although it has huge number of population. So many people of Bangladesh
working as a skilled or unskilled worker or human resources all over the world.
But there is dearth of skilled Human resources in Bangladesh both in technical
and management areas. So different institutions were set up to develop skilled
Manpower. After the opening up of the industrial sector and to export skilled
manpower to abroad, the need for skilled manpower has increase tremendously
in Bangladesh. Because the private entrepreneurs and foreign countries
delegates does not like to appoint key personnel in any areas of management
from non-professionals. On the other hand, the foreign investors also prefer
qualified members from different professional bodies of Bangladesh. The setting
up of some export processing zones in Bangladesh has amplified this
requirement.

 Technological Infrastructure: Technological progress plays an important role

in economic growth, which stimulates FDI. It includes more modest advances
the implementation of better business processes, involves the adaptation and
adoption of new technologies.

 Business start up: Data from the World Bank‟s „Doing Business Project‟
suggest that to start up a new firm in Bangladesh is relatively costly. Hiring and
firing workers is generally perceived easier than most other developing countries
in East and South Asia. An entrepreneur must complete seven procedures to
start a firm - the smallest number among a group of comparator countries in Asia
(Malaysia is also seven). Another measure suggests that including regulatory
and utility connection is relatively difficult in Bangladesh compared with other
Asian countries.

Some Key Roles of FDI Played in Bangladesh:

 Proper Utilization of Domestic Resources (Raw Materials and Labor):
Some nations have valuable and more resources, which can be utilized to
earn a lot of profits. But due to the lack of the proper investment and
efficient management, they cannot do that. By the FDI, local resources can be
used to increase the GNP of those countries. By the efficient use of
these local resources, the product cost will be reduced and the local people
can consume the products with their low income.

 Investment in Unconventional and Profitable Sectors: FDI has initiated

the door of tourism and hotel business in Bangladesh. When the Westin is
going to start its journey, at least two other international chain hotels
(Intercontinental Dhaka and Holiday Inn, Dhaka are also under
construction) showing the growth of hotel business in the country.
Dhaka‟s new hotel Radisson Water Garden has emerged as the best
performing hotel in the International chain‟s Asia Pacific region. Registering
$9.5 million revenue in the first year of operation, FDI in hotel is
gradually increasing in Bangladesh.

 Development of Skilled Personnel: Foreign technology and know-how

play a vital role to create efficient and skilled personnel in commodity and
service industries of the country. FDI help create employment opportunities in
various sectors e.g., five-star hotels in big cities like, Dhaka and Chittagong.

 Bangladesh- A promising Market Segment: According to market research

in Asia titled „eye on Asia‟ to better understand the region‟s consumer
behavior found that over 50 percent of Bangladeshi consumers are
young. They welcome new innovations, helping new companies introduce
with new products and services. This research indicates Bangladesh is one of
the fastest growing market in Asia for new investing opportunity.

 Bangladesh-An attractive Investment Center: Considering abundant,

cheap labor and low cost of infrastructures as well as congenial investment
climate in Bangladesh, Thailand has expressed interest to relocate its textile
and Ready-Made Garments (RMG) industry here. TATA Company has also
keen interest to make huge investment in fertilizer, power sector, steel, etc.

 FDI Reduces Imports, Saves Currency and Provides Lower Price of

Product :Bangladesh Garments Manufacturers and Exporters Association
(BGMEA) have adopted a three year plan to double exports. Different local
 and foreign companies have invested in the Garments sector, which has
created opportunity to export instead of import as well as lower the price of
Garments product available in Bangladesh. BGMEA is implementing a new
strategy to resolve the local and global barriers.

 Introduction of Advanced Technology: For the FDI, a country can enjoy

advanced technology in various sectors, which is not available in that
country. The Multinational Corporations (MNCs) have become vehicles for
transfer of technology, especially to the developing countries like
Bangladesh. The Research and Development (R&D) prospects need a lot
of investment, which is the main source of the introduction of advanced
technology.

Findings: FDI increases employment opportunities in Bangladesh and it helps the

country to transform itself into an industrial economy. Bangladesh cannot properly
negotiate with the giant foreign investors due to the weak bargaining power of the
government and officials. They cannot manage huge amount of investment for the
betterment of the country. Though FDI introduces many advanced technology, the
MNCs in Bangladesh are not yet interested to build their research and development
centers in the country. Bangladesh is not much developed technologically to attract
huge foreign investment in the country. FDI helps attain the GDP growth but for the
shortcomings of our own policy, a huge amount of foreign exchange flows out of the
country every year.

Threats in FDI:
 Periodic Flooding and Cyclones.

 Law & Order problems including Hartals.

Importance of FDI: FDI has been an important part of the economic transaction,
business liberalization and macro-economic growth story in BD over the last
decade. The Govt. has implemented a number of policy reforms designed to create
a more open and competitive climate for private investment, both foreign and local.
Conclusions and Policy Implications:
Bangladesh has a number of positive attributes that can successfully attract the
attention of foreign investors from both developed and developing countries. The
increasing availability of skilled and unskilled labor at relatively low wages and the
success in maintaining reasonably stable macroeconomic environment are a few factors
behind making the country an attractive destination for foreign investors. They are
generally aware that the wage rates in Bangladesh are among the lowest in Asian
countries, the rate of inflation is usually contained within tolerable limits, the exchange
rate is reasonably stable, custom regulations are investment friendly without
discrimination between foreign and domestic investors, and attractive incentive
packages are available for the foreign investors.
Bangladesh needs to undertake effective promotion measures to convince the potential
foreign investors that their involvement in business activities in the country is valued,
they would be facing friendly regulations, and they can enjoy investment incentives that
are competitive with those offered by other countries in the region and the developing
world. The country also needs to move forward through implementing investment
friendly policies, simplifying regulatory practices, and removing inefficient bureaucratic
procedures.
Over the last decades, almost all developing Asian economies including Bangladesh
have progressively adopted more open policies toward FDI and this trend is likely to
continue in the foreseeable future. The general conclusion of this study is that FDI
brings net benefit to Bangladesh. These benefits appear to be important for integrating
the domestic economy with the global economy and in the area of technology and skill
transfer.
The global experience suggests that, depending on the country context, the benefits of
FDI are highly uneven and can become ambiguous or possibly negative. However,
given its present characteristics, Bangladesh is likely to benefit through more FDI
inflows. It is important, therefore, for Bangladesh to ensure an investment climate that
can attract more FDI flows to the country.