CHAPTER1

Introduction

1.1Introduction:Direct Foreign investment (DFI) is a persuasive weapon of economic development of a country, especially in the current global context. It enables Bangladesh, a capital-poor country, to build up physical capital, generate employment opportunities, expand productive capacity, augment skills of local labor through transfer of technology and know-how, and help to integrate the domestic economy with the global economy. Industrial development is an important pre-requisite for economic growth of a developing country. Bangladesh is basically a country of agrarian economy, indeed rapid industrialization is essential in Bangladesh to keep pace with its development needs. But the low rate of Gross Domestic Savings and Investment as well as low level of technology base hamper the expected industrialization process. Foreign aids and grants had been serving to bridge the gap. As the developing countries are in the process of graduating from being aid dependent economy into a trading economy, therefore, FDI is viewed as a major stimulus to economic growth in these countries. Despite some policies reforms, Bangladesh could not attract handsome flow of FDI as yet.

1.2 Objectives:The main objective of the study is to analyze FDI inflows in Bangladesh.

The specific objectives are as follows: To analyze the FDI environment in Bangladesh. To analyze the trend of FDI inflows in Bangladesh. To measure the status of FDI inflows in Bangladesh as compared to India & Cambodia/Vietnam. To identify the major prospects and problems of FDI in Bangladesh. To provide some modest suggestions regarding FDI in Bangladesh.

CHAPTER2

Theoretical Background

2.1 Foreign Direct Investment (FDI):An investment into production or business in a country made by a company or entity based on other than host country ,either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies. The components of FDI are: a) Equity capital, b) Reinvested earnings and c) Intra-company loans. Equity Capital states the ownership as well as the share purchasing of an enterprise by a foreign investor. Reinvested earnings demonstrate that portion of earning of an investor which is not distributed back to him. This means the profits that are not given out as dividends. It is kept within the firm. Intra-company loans include debt transactions and these transactions are regarding lending by the foreign parent company to its affiliates in the form of both short and long-term.

2.2 Importance of FDI:There is a strong relationship between foreign direct investment and economic growth. Larger inflows of foreign investments are needed for the country to achieve a sustainable high trajectory of economic growth. In Bangladesh the countrys savings-investment gap had been mainly bridged by external economic assistance. However, after the cold war era, the availability of foreign aid is decreasing gradually. As a result, there is now widespread support for the need for FDI in Bangladesh. If the economy is to grow faster, as is being envisaged, there is the need for larger inflow of FDI in Bangladesh with a view to creating jobs for vast labor force, increasing foreign exchange earnings, acquiring new and modern technology and management skills, accelerating overall growth and development of the economy. FDI is thought of contributing to economic development through initial macroeconomic stimulus and by raising total factor productivity and efficiency of resource use in the recipient economy by:

Figure 1: FDI Transmission Mechanisms2.3 Bangladeshs Investment Regime:Bangladesh is well positioned as a favorable investment destination because of its large and growing local market. The economy has experienced a moderately accelerated annual growth of 5-6 percent since 1996, a range of constraints notwithstanding. Bangladeshs growth was resilient during the 2008-09 global financial crises (Table 3). The realized GDP growth in Bangladesh was in fact higher in 2010 (6.3%) than the IMFs projection of 5.4% growth for that year. The targeted GDP growth rate is 6.7% in 2011 and above 7% in the years till 2015.Table 1: Comparative Scenario of GDP Growth (%)Country/RegionActual Projections

200720082009201020112015

Bangladesh6.36.05.45.45.96.2

Cambodia10.26.7-2.64.86.86.8

India9.47.35.78.88.88.1

Vietnam8.56.25.36.06.57.5

Developing Asian Economies10.67.96.68.78.78.5

Emerging Economies and Developing Economies6.59.25.26.24.73.8

Developed Economies0.20.50.40.40.30.1

World5.23.0-0.64.24.34.6

Source: IMF, World Economic Outlook, 2010

Other favorable factors for FDI are the countrys geographically strategic location and moderate climate, efficient regional transport connectivity in terms of roads, ports and telecommunications infrastructure, lower energy costs, the presence of export processing zones that offer special facilities to foreign investors over local investors, and an investment-friendly legal framework. Bangladesh in fact offers the most generous of incentives in the South Asian region for foreign investment under its liberalized investment regime shaped by industrial policy and export-oriented, private sector-led growth strategy. The favorable natural factors and various policy supports extended by government for attracting foreign investment led global banks and multilateral institutions portray a highly optimistic outlook. JP Morgan, Goldman Sachs, Citicorp, and Merrill Lynch have identified Bangladesh as a highly attractive investment destination, projecting the country to be the next Asian Tiger. JP Morgan included Bangladesh in their Frontier Five. The Frontier Five was selected on the relative attractiveness of these countries based on macroeconomic and demographic trends. Goldman Sachs included Bangladesh in its list of Next 11 after the BRIC countries (Brazil, Russia, India, and China) and identified it as a country with the future potential to emulate the BRIC nations. Japan External Trade Organization (JETRO) in its 19th Survey of Investment-related Cost Comparison during January 2009 reported that Bangladesh is competitive in business support services like communications (mobile phone usage charges) and utilities (tariff for water and gas). Cost per cubic meter general use of gas in Bangladesh is the lowest compared to other Asian countries. The World Bank in its report Doing Business 2010 has ranked Bangladesh in the 20th position for Protecting Investors much above India (40), China (93), and Vietnam (172). For starting a business, Bangladesh was positioned at 98, showing a more favorable investment environment compared to India (169), China (151), and Vietnam (116). Global multinationals such as Mobil, BP, Procter & Gamble, and Lafarge have their strong presence in Bangladesh.

2.4 Policy Framework of Bangladesh Government toward FDI:Investment in an economy raises output and improves standard of living of the people. Since the supply of capital from the local source in Bangladesh is not adequate to meet the growing need for investment due to low rate of domestic savings, the importance of foreign capital in the form of FDI is increasing gradually. Now FDI is termed as a major stimulus to economic growth in the developing countries. Bangladesh Government has adopted several policy measures to boost the FDI flow in Bangladesh. The government of Bangladesh has listed the following five areas in which FDI should be encouraged under joint venture and 100% ownership by the foreigners:a) Export oriented industriesb) Industries located in the Export Processing Zones (EPZs)c) Industries that are based on high technology, which will either be import substitute or export orientedd) Basic industries based mainly on local raw materials and investment towards improvement of quality and marketing of goods manufactured and/or the increase of production capacities of existing industriese) Physical infrastructure projects on Build-Operate-Own (BOO) and Build-Operate- Transfer (BOT).The major incentives for foreign direct investment in Bangladesh are: Some of the incentives allowed for attracting FDI in Bangladesh are:1. No ceiling on investment2. 100% foreign equity participation allowed3. Tax holiday up to 10 years4. Allowances of accelerated depreciation in lieu of tax holiday5. Tax exemption and duty free importation of capital machinery and spare parts for 100% export oriented industries6. Residency permits for foreign nationals7. No restriction on issuing work permit to a foreign national8. Capital, profit and dividend repatriation facilities9. Term loans and working capital loans from local banks10. Avoidance of double taxation on the basis of bilateral agreement11. Tax exemption on the interest of payable to foreign loans and on royalties and technical knowhow fees12. Multiple entry visas for investors13. Convertibility of Taka for current account transactions 14. Protection of foreign investment through The Foreign Private Investment Act-1980 and Settlement of Investment Dispute (ICSID), The Multilateral Investment Guarantee (MIGA), and World Intellectual Property Organization (WIPO).2.5 Benefits of FDI:At the theoretical level, the benefits of FDI include the following:1) Overcoming domestic resource constraint. FDI can close the domestic resource gap by providing an outside source of financing for investment. FDI inflows are believed to be more stable and easier to service than other sources of foreign private capital such as commercial debts or portfolio investment.2) Raising the productivity of labour and capital. FDI raises the productivity of labour, and so raises the quality of employment. Economies of scope and scale and managerial efficiency can raise the productivity and returns of all production inputs.3) Generating employment. By creating new productive facilities, FDI creates more jobs in the economy. Increased employment, like investment, will have a multiplier effect on the economy and stimulate a dynamic growth cycle.4) Easing the balance of payments constraints. FDI leads to an improvement in the host countrys balance of payments and possibly also terms of trade. Foreign investment constitutes an inflow on the capital account and therefore allows the economy to sustain the deficit on the current account without devaluing the currency or introducing austerity measures. 5) Raising exports. Export-oriented TNCs can raise exports significantly. This is in fact one reason why developing country governments try to attract FDI through the creation of export processing zones (EPZs). 6) Access to technology. FDI brings in new technology, which may have positive spillover effects for other local firms. 7) Access to markets. TNCs can help host countries gain easy access to the lucrative markets of the rich countries. 8) Benefits to environment. TNCs have better access to and knowledge of environmentally sound technologies and are expected to bring such technologies to the host country. 9) Benefits to consumers. Consumers are likely to benefit from increased FDI inflows in the form of lower prices and improved product quality when the investment is cost-reducing and product-improving. Benefits also accrue to consumers because FDI is likely to introduce new products and thus widen the choice in consumer goods markets.10) FDI may also contribute increased revenue to the government.2.6 Factors Affecting Foreign Direct Investment:Because Foreign Direct Investment can significantly affect a countrys economy, the most influential factors are:

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.

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.

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.

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.

Tax Rates: Countries that impose relatively low tax rates on corporate earnings are more likely to attract FDI. When assessing the feasibility of FDI, firms estimate the after tax CFs that they expect to earn.

CHAPTER3

FDI Flows in Bangladesh

3.1 Current Situation of FDI in Bangladesh:Bangladesh is in the process of transition from a predominantly agricultural economy to a modern economy there has been a considerable change in global flows of trade and finance including a surge in FDI. Despite being a recent phenomenon, several underlying factors have contributed to increasing the FDI inflow in Bangladesh. These are trade and exchange rate liberalization, current account convertibility, emphasis on a private sector led development, liberalization of the investment regime, opening up of infrastructure and services to the private sector both domestic and foreign, and above all the growing interest of foreign investors in energy and telecommunication sectors. It is argued that more open trade policies are associated with the presence of foreign firms and economy wide technological and productivity gains in developing countries like Bangladesh. The private sector is envisaged to play an increasingly active role with public sector development programmers concentrating on basic infrastructure and human resource development. In recognition of the private sectors ability to contribute towards achievement of the goal of socio-economic improvement of its people, the government has recently implemented policy reforms to create a more open and competitive climate for both foreign and local investment.

3.2 Actual Foreign Direct Investment- FDIThe actual FDI recorded US$ 1194.88 million in FY 20011-12. During FY 2012-13; the actual FDI recorded US$ 1730.63 million, which was not only higher than the previous fiscal year but also highest ever. The key feature of this increasing flow of investment during FY 2012-13 was a favorable investment environment and political stability. We see that the FDI trend is upward sloping since FY 09 (presented in table) except in FY 20010-11 where actual FDI recorded US$ 779.04 which is lower than the previous fiscal year.

Table 2 : Recent Trend in FDI inflows in Bangladesh (In US$ Million)FYFY 04FY 05FY 06FY 07FY 08FY 09FY 10FY 11FY 12FY 13

FDI284.1803.8744.6792.8767.7960.6913.02779.041194.91730.6

% -183%-7%6%-3%25%-5%-15%53%45%

**Sources: Statistical Department, Bangladesh Bank

Figure 2: FDI Inflows in Bangladesh (Million in US$ )3.3 Sector-wise Inflows of FDI:Sector-wise analysis of FDI reveals the fact that a shift has been made by the foreign investors in their investment in Bangladesh. The pie chart shows the trend of FDI towards power and energy, manufacturing and telecommunications, whereas the neglected sectors were agricultural, Services and trade and commerce. In 2013, the main focus of investment was in the manufacturing sector in total but telecommunication sector individually is highest position. The success in textiles through the ready-made garments (RMG) industry was a vital part of this investment.

**Sources: Statistical Department, Bangladesh BankFigure 3: Sector wise FDI inflows in FY 20133.4 FDI Inflows (in million USD) by countries:

The United Kingdom has gained the top most position among the top 10 investing countries in Bangladesh during 1996-2012 in investing in various sectors of economy. Out of total FDI inflows from the top 10 investing countries during this period, 17.4% was from United Kingdom, 13% from USA, 8% from Egypt, 7.7% from South Korea, 6.4% from Netherlands, 6.2% from Singapore, 5.6% from Hong Kong, 5.2% UAE, 4.8% from Japan, 3.5% from Malaysia, 3.2% from Australia, 2.1% from Denmark, 2.1% from Switzerland. The figure shows in FY 2013, Malaysia has gained the top most position among the countries investing in Bangladesh with USD 337.97 and followed by UK and Egypt.**Sources: Statistical Department, Bangladesh BankFigure 4: FDI Inflows (in million USD) by Countries in FY 20133.5 FDI as a % of GDP:

Figure 5: FDI as a % of GDP3.6 Comparison among Export earning, Foreign Aid, Remittance & FDI:

Figure 6: Comparison among Export earning, Foreign Aid, Remittance & FDI

3.7 FDI Environment in Bangladesh Strategic Location of Bangladesh Advantageous Trading Agreements Attractive Business and Investment Climate Improving Education and Skills English Widely Spoken Bangladesh Export Competitiveness Competitive Cost Base Export Processing Zone FDI Magazine's Rankings

table 3: Comparison on Economic Freedom in Asia Pacific Region

Name of the countryBusiness freedom (%)Trade freedom (%)Monetary freedom (%)Investment freedom (%)

Bangladesh68.75467.555

Cambodia40.765.280.760

China46.471.674.225

India35.564.162.935

Indonesia54.673.975.235

Philippines54.375.577.140

Singapore97.29084.875

Sri Lanka7877.168.530

Thailand72.575.269.315

Vietnam61.179.675.115

4CHAPTER

Comparison between Bangladesh & Cambodia

4.1 Trend of Foreign Direct Investment, Net InflowsThis series shows Net Inflows (new investment inflows less disinvestment) in an economy from foreign investors. Data are in U.S. dollars. The latest value for Net Inflows in Cambodia was USD 1,557,134,885as of 2012. Over the past 9 years, the value for this indicator has fluctuated between USD 131,416,229 in 2004 and USD 1,557,134,885in 2012. On the other hand, the latest value for Net Inflows in Bangladesh was USD 1,178,439,622as of 2012. Over the past 9 years, the value for this indicator has fluctuated between USD 448,905,401in 2004 and USD 1,178,439,622in 2012.Table 5: FDI inflows in BD & CambodiaYearCambodiaBangladesh

2004131,416,229448,905,401

2005379,180,191813,321,972

2006483,209,383697,206,284

2007867,288,539652,818,719

2008815,180,2181,009,623,164

2009539,113,440732,809,636

2010782,596,735918,172,638

2011901,668,5911,137,916,361

20121,557,134,8851,178,439,622

Source: http://data.worldbank.org

A graphical comparison of Foreign Direct Investment, Net Inflows of these two countries is shown below

Figure 7: Comparison of Foreign Direct Investment4.2 Factors that Attract Cambodia as Best FDI Destination:Amidst global economic frailty, Foreign Direct Investment in Cambodia grew by an impressive 67% in 2012. The FDI reached USD1.6 billion in 2012, compared to USD 902 million in 2011. There are investment opportunities in the following sectors in Cambodia Agriculture and Agro Industry Transportation and Telecommunication Sector Energy Sector Labor Intensive Industries and Export Oriented Industries Processing Industry Tourism Sector Human Resource Development Oil & Gas, MiningThe influx in investment is credited to the following factors Safe Banking Sector: One of the authorities playing a key role in Cambodia's macro-economic success is the National Bank of Cambodia (NBC) which has overseen trade policies, market liberalization and low inflation that has defined the country's economic development. Cambodias strength in Greenfield projects in retail banking. Over the past decade, Cambodias banking sector attracted the most capital, US$2.3 billion, of any least developed country, and the second highest number of projects, at 56.Strong Bilateral Relations: Economic diversification is attracting substantial sums of FDI from China and beyond. Home to the fastest-growing economy in Southeast Asia, Cambodia enjoys excellent bilateral political and fiscal ties to the People's Republic of China that continue to strengthen after being formed 55 years ago. Small Businesses Serve as Backbone of Sustainable Economy: Historically, Cambodia has relied on the role of small- and medium-sized enterprises (SMEs) as the backbone of a sustainable economy. Generally, in Cambodia when we talk about SME economic activities, we are in fact talking about micro-small and medium-sized enterprises (MSMEs), as out of the more than 500,000 economic establishments or enterprises counted in the 2011 Cambodia Economic Census, some 493,000 of them employ only one to 10 employees. Growth in the number of MSMEs could help expand the economy, create more jobs, facilitate Foreign Direct Investment, and enlarge the tax collection base. Strategic Position: Home to the fastest-growing economy in Southeast Asia, Cambodia enjoys a strategic position. Established in 1986, Phnom Penh Autonomous Port is the country's second largest international port and boasts a strategic position at the intersection of four major rivers in the heart of the country.Business Climate :Rich in history and culture and blessed with wonderful natural and human resources that are driving its impressive economic growth and attracting record sums of foreign direct investment (FDI), the Kingdom of Cambodia offers investors a modern, friendly and welcoming business climate. Investment Protection: The Investment Law and Sub-decree of Cambodia contain a number of important guarantees for the investors: Equal treatment of all investors No requirement of local equity participation No price controls on products or services No restriction on ForEx convertibility Free remittance of foreign currencies abroadThere are several investment incentives such as 20% Corporate Tax Tax holidays of 3years Full Import Duty Exemption Repatriation of profit (withholding tax) Reinvestment of earning (special depreciation)Labor Intensive Economy: Many major international companies have invested hundreds of millions of dollars in labor-intensive garment and manufacturing industries to take advantage of the country's young population and duty free access to a number of lucrative markets such as the EU. Businesses are looking to cut costs in labor intensive industries, particularly the garment sector. Cambodia is touted as a bright spot in Southeast Asia, where overall FDI increased by only 2%.Special Economic Zones (SEZs): Cham Prasidh, senior minister and minister of Commerce, has played a key role in Cambodias emergence as leading FDI destination and in the creation of more than 20 strategically-located Special Economic Zones (SEZs) around the country which ensure better infrastructure and One Stop Services/SEZ Zone Administration, including SEZs near the borders with Thailand and Vietnam. 22 SEZs have been authorized and are being developed by private investors/operators. Five SEZs are currently in operation, the remainders are in various stages of development.

4.3 Comparison between Cambodia & BangladeshProportion of investment: In general, there are no restrictions on the percentage of equity that foreign nationals may hold in a locally incorporated company where as 100% foreign ownership permissible in Bangladesh; no ceiling on foreign and local investment.

Export Processing Zone: Cambodias emergence as leading FDI destination and in the creation of more than 20 strategically-located Special Economic Zones (SEZs) around the country but in Bangladesh there is only 8 export processing zone which is very limited in terms of export volume of the country.

Investment Incentives: Cambodia offers liberal tax policy, import duty and opportunities for carry forwarding losses, 50 years of land lease program for regular projects. Besides, Bangladesh offers Tax- Remittance of royalty, technical know-how and technical assistance fees, repatriation facilities of dividend and capital at exit.

Tax holiday: Cambodia attracts foreign investor for FDI by offering Tax holidays of 3years & Full Import Duty Exemption where as in Bangladesh Tax holiday up to 10 years & allowances of accelerated depreciation in lieu of tax holiday.

Minimum wage: Still, Cambodia continues to show signs of steady improvement in other areas. For example, minimum wage was recently raised $14 to $75, from $61. According to the BFC, a $5 health care allowance per worker was also instituted as part of the same legislation. Where as in Bangladesh minimum labor cost is appx $66 which is still lower than that of Cambodia.

Investment-related laws: Current Cambodian laws and regulations have been developed to create a legal framework suitable for the market economy and consistent with experience and practice in developing countries, especially ASEAN member countries. Land ownership provisions are similar to those in Viet Nam, Indonesia and the Lao Peoples Democratic Republic, where foreigners cannot own land. Tax nomenclature has been reformed in accordance with the Harmonized System (HS) tariff codes of ASEAN.4.4 Challenges: Corruption: Although the businesses in Cambodia are optimistic of the countrys economy, its appeal as an investment destination lags behind most of its neighbors due to the perception of endemic corruption. There are several benefits of doing business in Cambodia as mentioned above. For companies already operating in Cambodia, the profit outlook was overwhelmingly positive.

Accuracy of the Statistics: For the first time in recent memory, the Ministry of Economy and Finance has released growth projections for the first half of the year, and the numbers are good. The ministrys preliminary data claims that from January through June, economic growth stood at 7.6 percent, an announcement that critics are questioning not only for accuracy but also for timing.

Risk of Credit Growth: The World Bank has warned that the rapid growth of lending by Cambodias Banks is still a concern, despite a recent slow-down in credit disbursals. Credit growth, which has been driven largely by wholesale and retail financing, and starting in 2011 agriculture financing, has eased to 29.2 percent (year on year) in January 2013. The annualized rate of lending growth was 34 percent in December and as high as 34.6 percent in January 2012.

Limited Access to Capital: Commercial banks are a primary source of funding. Limited access to capital is one of the constraints of doing business in Cambodia. In 2011, the key players in Cambodias financial sector are 31 Commercial banks, 2 Representative Offices,7 specialized banks and 32 microfinance institutions, 28 micro-finance NGOs and 11 insurance companies. The top-4 holds over 70% of total deposits and loans in the banking system.

Ownership and Use of Land: The Law on Investment of Cambodia restricts foreigners from owning land in Cambodia since land ownership is reserved to natural and legal Cambodians.

Employment of Foreigners: A business is entitled to obtain visas and work permits for the employment in Cambodia of foreign citizens as managers, technicians and skilled workers, if the qualification and expertise are not available in Cambodia.

5CHAPTER

Comparison between Bangladesh & Vietnam

5.1 Overview of FDI Environment in Vietnam: Competitive advantages of Vietnam are stated bellow- Business environment Emerging market Human resources Natural Resources- land, water, mineral, nautical, tourism resources etc

5.2 Comparison between Bangladesh & VietnamBangladesh and Vietnam both of the country faces GDP growth rate around 5% and 6.3% respectively for last five years. They have similarity in many aspects i.e. tropical culture, geographic location, seaports. Both the country had bitter experience of outside aggression as well. Bangladesh achieved its independence in the year 1970 where as Vietnam achieved it in 1975. Even after having so much of similarity, Vietnam is far ahead of Bangladesh in attracting FDI. The FDI in Vietnam contributed in economic advancement, employment generation, technology transfer etc. Strategic differences to attract FDI are shown below

Proportion of investment: Vietnam allows at most 49% foreign shares for joint stock company where as 100% foreign ownership permissible in Bangladesh; no ceiling on foreign and local investment.

Investment Opportunities: Vietnam encourages FDI in developing infrastructure, information technology, electricity, finance and banking sectors of the country through providing different incentive programs, tax holiday (5% value added tax), almost no restrictions on the entry and exit mode and transfer of capital or profits out of Vietnam. In contrast Bangladesh are ready to encourage FDI in mostly information technology, power generation sectors through providing investment friendly environment i.e. no prior approval requirements or limits on equity participation and repatriation of profits and income are required in most sectors. Moreover, full repatriation of capital & dividend is allowed at Bangladesh.

Export Processing Zone: Vietnam encourages its export through establishing 283 export processing zone throughout the country. Presently 180 out of 283 EPZs are active in Vietnam but in Bangladesh there are only 8 export processing zone which is very limited in terms of export volume of the country.

Investment Incentives: Vietnam offers liberal tax policy, import duty and opportunities for carry forwarding losses, 50 years of land lease program for regular projects. Besides, Bangladesh offers Tax- Remittance of royalty, technical know-how and technical assistance fees, repatriation facilities of dividend and capital at exit. Moreover, permanent resident investor permits on investing US$ 75,000 and citizenship on investing US$ 500,000. Businesses exporting 80% or more of goods or services qualify for duty free import of machinery and spares, bonded warehousing.

Tax holiday: Vietnam promotes export products and services by applying 0% value added tax on the same. They also offers enterprise income tax for small business is 28%, surveying or exploring of natural and precious resources tax rates are from 28% to 50% depending on individual projects and enterprises. However, Ten years tax holiday for the Industries to be established before 1st January, 2012 and Industries to set up after 31st December 2011 tax holidays for Dhaka and Chittagong Divisions are 100% in first two years, 50% in the year three and four, and 25% in the year five; and for other Divisions and three Chittagong Hilly Districts are 100% for first three years, 50% for next three years, 25% for year seven. Besides, MNCs are free from double taxation and exemption from dividend tax in Bangladesh.

Depreciation allowances: In Vietnam the maximum rate of depreciation shall not be more than twice the level of depreciation as stipulated by regulations on depreciation of fixed assets. Besides, in Bangladesh accelerated depreciation for new industries is available at the rate of 50%, 30% and 20% for the first, second and third years respectively, on the cost of plant and machinery.

Allowances of Domestic sales: In Bangladesh domestic market sales of up to 20% is allowed to export oriented business located outside an EPZ on payment of relevant duties which creates competition for local producers. No such kind of facility has been appreciated by Vietnam exports.

Interest rates: Interest rates for loans from commercial banks in Vietnamese currency varies from 20 ~ 24% and in US dollars varies from 13.5 ~ 15% including all charges. But in Bangladesh presently lending rate is 12.5% and borrowing rate varies from 15% ~ 18%. From this point of view Bangladesh is more favorable than Vietnam for FDI.

Tariff free Export country: 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. While 73% of Chilean exports will be granted tariff-free access to Vietnam, accordingly 75% Vietnamese exports will be granted a tariff- free access to Chile according to Embajada de Chile en la Repblica Socialista de Vietnam.

Credit Facility: Vietnam offers favorable borrowing options to its investors. Bangladesh offers 90% loans against letters of credit and funds for export promotion, export credit guarantee scheme, cash incentives and export subsidies are granted on the FOB value of selected exports ranging from 5% to 20% on selected products. In addition investors are allowed for Foreign Currency loan from abroad under direct automatic route in Bangladesh.

Investment expenses: Industrial estate rent in Dhaka is cost effective than Shanghai, Jakarta, Bangkok. Office rents are also very competitive with other international cities. Dhaka's housing rent for foreigners are less expensive than Singapore, Mumbai, Karachi, Hanoi. Domestic bidders cost ranges from 140 USD ~ 170 USD/m2 where Foreign bidders cost ranges from 250 USD ~ 350 USD/ m2.

Working capital expenses: Compared to Vietnam, Cost of diesel in Bangladesh is found to be more competitively priced as vehicles increasingly use LPG. However labor costs are relatively low in Bangladesh but number of skilled labor is high at Vietnam as such Vietnam enjoys competitive advantage over Bangladesh. Other overhead costs are relatively same in both the countries.

6CHAPTER

FDI inflows in India and Overall Environment

6.1 Current Situation of FDI in India: India has received large FDI inflows in line with its robust domestic economic performance over the last two decades. The attractiveness of India as a preferred investment destination could be ascertained from the large increase in FDI inflows to India, which rose from around US$ 6 billion in 2001-02 to almost US$ 33 billion in 2011-12. The significant increase in FDI inflows to India reflected the impact of liberalization of the economy since the early 1990s as well as gradual opening up of the capital account. Inter alia, there are some key factors which contributed the huge upsurge in Indias FDI Inflow in recent years.

Figure 8: FDI Flows in India6.2 Essential Change in Policy Framework: There has been a radical change in Indias approach to foreign investment from the early 1990s when it began structural economic reforms encompassing almost all the sectors of the economy. Historically, India had followed an extremely cautious and selective approach while formulating FDI policy in view of the dominance of import-substitution strategy of industrialization. With the objective of becoming self reliant, there was a dual nature of policy intention FDI through foreign collaboration was welcomed in the areas of high technology and high priorities to build national capability and discouraged in low technology areas to protect and nurture domestic industries.

6.3 Policy Measures: During the pre-liberalization period, the regulatory framework was consolidated through the enactment of Foreign Exchange RegulationAct (FERA), 1973 wherein foreign equity holding in ajoint venture was allowed only up to 40%. An Indian company may receive Foreign Direct Investment under the two routes as given under:i.Automatic Route: FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.ii.Government Route: FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. The Indian company having received FDI either under theAutomatic routeor theGovernment routeis required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank.

6.4 Economic Factors:Market Size: A large consumer market means more potential of consumption and thus more opportunity for trade. It also provides lower production costs through scale economies. Countries having larger consumer market should receive more inflows than that of smaller countries. And India being country with the second largest population in the world (1.24 billion approx.) offers a huge opportunity to foreign investors.

Labor cost: Higher labor cost in the home country is expected to pull the FDIs to host country. With more than 70% of the population comprising of the middle class and lower middle class, India is accommodating labor intensive industries being shifted from the western buyers. This abundance of cheap labor is nowhere to be found other than the subcontinent.

Economic stability and Growth prospects: FDI tends to flow to the countries with larger market size and higher economic growth rates in which larger economies of scale could be provided for FDI to exploit their ownership advantages. With a forecasted GDP growth rate of 3.21% by the year 2030 (forecast by Trading Economics) the huge potential of India remains untapped. To complement the growth rate, low inflation rate, depreciation of Indian Rupee and lower interest rates have also helped to attract more FDI. Trade openness: Numerous empirical studies suggest that trade (imports and exports) complements rather than substitutes for FDI. Multinational enterprises (MNEs) tend to invest in the trade partner markets with which they are familiar. Much of FDI is export oriented and may also require the import of complementary, intermediate and capital goods.

Infrastructure facilities: Well established and advance infrastructure facility narrates about the prosperity of the country and provides opportunity for FDIs. Government not only established special economic zones (SEZs) but also designed liberal policy and provided incentives for promoting FDI in these zones with a view to promote exports.

6.5 Pitfalls of India to Attract FDI: Administrative procedure is still cumbersome and stringent. On receipt of FDI, investee has to report to RBI through his banker within 30 days and allotment has to be made within six months of receipt of funds. Non-observance of this procedure lands a recipient company in a serious trouble. Lack of an effective and expeditious alternative dispute resolution mechanism. Sectorial caps (especially in insurance) and restrictions on FDI flows (especially in multi-brand retail).The main apprehensions in India, however, are that FDI in retail would expose the domestic retailers especially the small family managed outlets - to unfair competition. High trade and transaction costs. Still lagging behind china in crucial factors like ease of registering property, trading across borders, enforcing contracts and closing business etc.

CHAPTER7

Prospects & Problems of FDI in Bangladesh

7.1Prospects of FDI in Bangladesh:Like most other developing and least developed countries, Bangladesh considers FDI as an important resource for development. In order to attract more and more FDI, the country undertook a massive liberalization of its investment program. It can influence our trade commerceand industrial sector for quick development. The opportunities of investment in Bangladesh can be gained in two aspects. One is the resource advantage like GAS, Agro products including fisheries and low cost labor and the other is the development of power, Telecommunication and transportation sectors.

Bangladesh is not self-sufficient in energy sector. There is already growing interest among international oil companiesin contracts for exploration in this field. The Gas sector has by now drawn large amounts of foreign investment. It has to be assumed that FDI is increasingly becoming a significant source for financing domestic investment in Bangladesh. But unlike in Srilanka and some other countries in the region the FDI is focused on export oriented activities in Bangladesh. The countries in the region the FDI is focused on Export oriented activities in Bangladesh. The administrative system for FDI needs to be effective in dealing with foreign investors and their needs. Economic conditions conducive to foreign investment are the key determinants but they rely more on political stability and recognized dissemination of facts.

7.2Problems of FDI in Bangladesh:Despite substantial changes in government policy, Bangladesh has failed to attract satisfactory levels of FDI and reasons for this failure can be identified quite easily. Government policy is obviously an important factor influencing inflows of FDI. But, there are other, equally important factors. So far as the investment related policies of the government are concerned, these are fine in spirit, but their actual implementation continues to create obstacles for both local and foreign investors. An inefficient and not-too honest bureaucratic system is primarily responsible for this problem. All the administrative barriers are in fact generated from this non-investment-friendly bureaucratic system.The problems that have restricted FDI potentials in the country are as follows:1. Bureaucratic interference 2. corruptions3. Irregularities in processing papers 4. Overlapping administrative procedures 5. Absence of a transparent system of formalities 6. Continuity and prevent timely implementation of strategic, procedural, and even routine duties 7. Frequent power failures 8. Poor infrastructure support 9. Labor unrest 10. Political unrest 11. Lack of professional personnel 12. lack of commitment on the part of local investors 13. Unexpected delays in selecting projects in studying feasibility 14. Frequent changes in policies on import duties for raw materials, machinery and equipment etc.

CHAPTER8

Conclusion

8.1 Conclusion:Bangladesh has a number of positive attributes that can successfully attract the attention of foreign investors from both developed and developing countries. In Bangladesh FDI plays a very important role in achieving expected economic growth. FDI flows have been successful in increasing GDP. At the same time, FDI has also made a contribution in improving the income level of Bangladesh. 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.

References:

1. Ahmed, Q.M. (1993): Foreign Direct Investment: Selected Issues and Problems with Reference to Bangladesh: Bank Parikrama,2. Bangladesh Economic Review (2012). Finance Division, Ministry of Finance, Government of Bangladesh.3. BB: Economic Trend, (Various Issues), Bangladesh Bank, Dhaka.4. Billah A. Md., Foreign Direct Investment Scenario:Bangladesh Perspective, Thoughts on Economics, Vol. 22, No. 015. Hossain A. Muhammad, Impact of Foreign Direct Investment on Bangladeshs Balance of Payments: Some Policy Implications PN 08056. Mian, E.U. and Alam, Q. (2006). FDI and development: Bangladesh scenario, Monash Business Review, Vol. 2, Issue 1.7. Rayhan A., Foreign Direct Investment in Bangladesh: Problems and Prospects, ASA University Review, Vol. 3 No. 2, JulyDecember, 2009UNCTAD (2013): World Investment Report, United Nations, New York.8. UNCTAD (2010): World Investment Report, United Nations, New York.9. UNCTAD (Aug, 2010): An Investment Guide to Bangladesh, United Nations, New York.10. UNCTAD (Aug, 2010): An Investment Guide to Cambodia, United Nations, New York.11. UNCTAD (Aug, 2010): An Investment Guide to Vietnam, United Nations, New York.12. http://edupedia.educarnival.com/fdi-and-its-impact-in-bangladesh/13. http://www.asaub.edu.bd/data/asaubreview/v3n2sl8.pdf14. http://www.boi.gov.bd/index.php/investment-climate-info/fdi-in-bangladesh15. http://www.ierb-bd.org/wp-content/uploads/2012/10/FDI-Arif-billah-Revised-08-03-2012.pdf16. http://notunprojonmo.com/wp-content/uploads/2011/07/E18-pn0805.pdf

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